The upside potential is limited due to aggressive tightening measures and plans by global central banks

After the recent rally, oil prices are slightly lower on Wednesday. Earlier in the week, Brent crude received a strong boost from a pullback in the US dollar in combination with upbeat risk sentiment in the global financial markets. Oil futures jumped to more than one-week highs around $107.60 a barrel before retreating below $106 a barrel in recent trading.

In industry news, the American Petroleum Institute reported a 1.86-million-barrel increase for the week ending July 15, versus +333K expected.  Now that the US inventory report from the Energy Information Administration looms, Brent looks confused, as larger-than-expected increase may weigh on prices further, signaling the potential end of the recent ascent.

The upside potential is also limited due to aggressive tightening measures and plans by global central banks. Of note, the UK CPI came in at 9.4% in June, beating estimates of a 9.3% print, which implies that the Bank of England will hike rates by 0.5% at the next meeting. Meanwhile, the ECB is widely expected to deliver a 0.25% (or 0.5%) hike on Thursday.

Given this fundamental backdrop, oil prices are unlikely to extend the rally in the near term even as positive risk sentiment persists so far. Failure to hold above $105 would pave the way towards the $103 intermediate support on the way towards the $100 psychological level.

However, as the overall demand remains healthy at this stage, with consumption growing thanks to the waning effects of the COVID-19 pandemic, the downside potential remains limited as well. Also, worries about tight supply continue to persist, capping the selling pressure at the current levels.


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