Brent crude struggles to resume the ascent after a rejection from fresh multi-week highs in the $43.30 area. On Tuesday, oil prices briefly derailed the $40 critical support level, a break below which could bring deeper losses in the short term.
As risk sentiment deteriorated today, with both European equities and Wall Street index futures losing ground, oil futures failed to trim yesterday’s losses and had to extend the bearish correction. The main driver behind the current profit-taking is the news that Saudi Arabia, Kuwait, and the United Arab Emirates would not extend voluntary cuts of 1.2 million barrels per day next month. As a result, supply concerns reemerged and drove the prices lower.
Also, the resurgent dollar demand amid the prevailing risk-off tone added to the negative pressure surrounding Brent despite the OPEC+ group on Saturday agreed to extend record cuts of 9.7 million barrels per day until the end of this month.
However, should the futures manage to hold above the $40 handle in the near term, a recovery could be expected. Even more significant support now arrives at the $39,65 level where the 100-DMA lies. As long as the prices stay above this figure, bearish risks are limited.
Later in the day, the API reveals its traditional weekly inventory report. If the data point to a contraction of crude and gasoline stockpiles amid further signs of a recovery in energy demand due to the reopening of the economy, oil prices may derive local support from the release and regain the $41 handle by the end of the day.
Of note, the two-day FOMC meeting concludes on Wednesday. The outcome of the policy meeting could affect the oil market through dollar dynamics. If the greenback rallies amid the central bank’s rhetoric, it would be oil-negative. In a wider picture, it looks like the recovery in Brent will continue after a break as investors continue to bet on a more rapid economic recovery from the coronavirus crisis. Once Brent regains the $43 figure, it may target the $45 figure in the medium term.