Driven by hopes for economic recovery in the aftermath of the coronavirus pandemic, oil prices registered fresh more than two-month highs yesterday. After a short-lived rally above $37, Brent crude failed to confirm a break of this level and retreated afterwards as traders started to take profit at more attractive levels.

On Wednesday, oil futures are trading with a slight bearish bias as risk sentiment has deteriorated after the renewed US-China tensions over Hong Kong. As Trump threatened to impose new sanctions against Beijing while China vowed to retaliate, market participants started to express concerns over further escalation in trade tensions between the two economies, which is especially painful amid the coronavirus pandemic that derailed growth in the global economy and caused a plunge in energy demand across the globe.

In the short term, Brent will likely remain under pressure due to the mentioned risk factor. However, once investors digest the escalation in the conflict, the risk-on tone could reemerge and thus lift oil prices. A daily close above the $36 figure will point to limited downside risks and could open the way to another attack at the $37 level. A decisive break above this barrier will shift market focus to the $40 psychological handle but the possibility of a recovery above this figure is fairly low at this stage as demand concerns are still there.

Later today, the American Petroleum Institute reveals its traditional weekly report on UC crude oil inventories. Should the release point to a rise in crude stockpiles, Brent may settle below $36. On Thursday, the EIA report will set further tone for commodities. In a wider picture, market sentiment will further depend on risk trends, so investors will continue to closely monitor developments on the geopolitical, economic, and political fronts in the short- and medium-term. 


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