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Oil prices retreat from post-pandemic high despite plunging inventories

oil prices

Oil prices are retreating from their post-pandemic highs despite a beyond-expected drop in crude inventories reported by the United States only two days ago.

The front-month contract of Brent futures is trading 0.5% lower in early commodity trading action today at $68.65 per barrel while the price of WTI futures – the US benchmark for crude – is slipping 0.53% at $65.28 per barrel.

March was a particularly good month for commodities and crude was not the exception, with both the West Texas Intermediate (WTI) and Brent advancing 7.5% and 6.4% respectively amid what analysts have categorized as a super-cycle in the commodities market, primarily supported by a strong economic recovery in the United States, China, and Europe.

Meanwhile, the month of May has started strong for oil prices as well, with both benchmarks advancing 3.1% and 2.9% respectively on the back of an unexpected drop in US crude inventories reported by the Energy Information Administration (EIA) yesterday.

According to data from the agency, US crude inventories slid by 8 million barrels to end last week at 485.1 million barrels, making this the third strongest weekly drop in US inventories reported this year. Meanwhile, analysts had predicted a milder decline of 2.3 million barrels.

Strong refining activity and lower imports may partially explain this weekly drop in oil inventories, while analysts are keeping an eye on the situation in both India and Japan as the demand from these two countries could be affected for longer than expected by a worsening virus situation.

In this regard, Commerzbank analysts shared the following comments in a note to clients: “The record numbers of new infections in India have been making the headlines and fueling fears that demand may recover more slowly”.

Meanwhile, analysts from ING Economics stated: “If we were to eventually see a national lockdown imposed, this would likely hit sentiment”.

Just yesterday, India reported the highest daily virus tally since the second wave started, with the number of cases jumping to approximately 412,000 while daily deaths also climbed to 3,982.

Meanwhile, the virus situation in Japan appears to be improving, as cases seem to have topped near the 6,000 level on 30 April with the numbers starting to retreat since then to 4,075 daily cases reported yesterday.

What’s next for oil prices?

oil prices 1
Brent futures (BR) price chart – 1-day candles with multiple indicators – Source: TradingView

The latest price action in Brent futures has resulted in a fourth tag of a long-dated resistance at the $70 level. The more this threshold is tagged, the higher the probabilities that the price could break above in short notice.

That said, there is the risk that this could also be a near-term double-top formation, a pattern that had disastrous consequences back in 2019-2020 before the pandemic started.

For now, both the MACD and RSI are in positive momentum territory while the short-term moving averages for Brent futures just posted a golden cross. Based on these indicators, the outlook continues to be bullish for crude prices but there are risks that the situation in India could derail the performance of both benchmarks if a national lockdown is imposed.

Only two days ago, the political opposition and business leaders have called for further measures to slow down contagions but so far the government has refused to follow through with these demands, with Prime Minister Narendra Modi strongly opposing another nationwide lockdown.

Traders should keep an eye on this situation moving forward as the current technical setup for oil is quite dangerous and the presence of a negative catalyst could quickly reverse the latest uptrend.

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Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.