However, the current rally may be unsustainable as there are still too many risk factors that could deter oil bulls
Crude oil prices rallied above the $45 handle on Wednesday and extended gains to the $45.60 area in recent trading. As such, Brent registered fresh March highs and looks poised for further gains in the short term. However, as the overall risk sentiment remains unstable, a bearish correction could take place at any point.
The market is driven higher by several factors. First, the API report showed overnight that crude oil stockpiles in the United States declined by 8.6 million barrels versus -3 million expected. Second, the US dollar came under renewed selling pressure across the board amid a steep decline in the US 10-year Treasury yields, sending gold prices to fresh record highs above the $2,000 psychological handle. Third, investors express hope for some progress on the fiscal stimulus package in the US that could support the recovery in the economy struggling amid the ongoing coronavirus pandemic.
However, the current rally may be unsustainable as there are still too many risk factors that could deter oil bulls and trigger profit-taking at attractive levels. In particular, the pandemic in several countries continues, threatening the fragile recovery in their economies. Besides, tensions between the US and China keep rising and could hurt the economic recovery as well. This in turn may derail the recovery in global energy demand, which is negative for oil prices, especially as OPEC+ countries have scaled back oil production cuts from this month.
From the technical point of view, Brent crude needs to confirm a break above the $45 handle on a daily closing basis. Otherwise, the futures could retreat to the familiar range, or suffer even steeper losses. On the upside, a break above the $45.60 region will open the way towards the 200-weekly moving average that arrives around $47.40. The daily RSI hasn’t entered the overbought territory just yet, suggesting Brent could see some more gains before a correction takes place.