The futures slipped below the $60.50 area, now threatening the $60 handle

This week, oil prices broke the multiyear downward trend following a rise above the $60/barrel resistance level. Brent crude climbed to fresh January 2020 highs around $61,70 earlier in the week before correcting lower in recent trading. On Friday, the futures slipped below the $60.50 area, now threatening the $60 handle as the corrective momentum is building. 

Optimism in financial markets in general fueled the recent rally in the commodity. Now, as risk sentiment has been deteriorating, some profit-taking in the oil market looks appropriate, especially considering the overbought conditions.

Fundamentally, the recent slide in Brent was driven by the news that OPEC and the International Energy Agency cut their demand forecasts. While the agency said oil supply was still outstripping demand globally, the Organization of the Petroleum Exporting Countries noted that oil demand around the world in 2021 will recover more slowly than earlier expected.

In a wider picture, the average Brent oil prices trade between $50 and $60/barrel are expected in the coming months or quarters. However, if the economic recovery from the pandemic accelerates substantially, the futures could settle in a higher range.

In the short term, a break below the $60 handle could trigger a more aggressive downside correction and could pave the way to the ascending 20-daily moving average that arrives at $57.44 today. As long as the prices stay above this MA, bearish risks are limited. On the upside, a decisive break above the $62 figure is needed for confirmation of another breakout. However, the second scenario looks unlikely at the moment.

Of note, the dollar extends the recovery following the recent sell-off, adding to the negative tone in the oil market. Furthermore, global stocks continue to retreat ahead of a long weekend in the US, increasing the risk of a deeper retreat in Brent crude in the near term. The futures were last seen trading at fresh four-day lows around $60.35.

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