Oil prices to face pressure despite rallying over 5% this week

WTI and Brent crude oil prices continued to push higher on Wednesday, following new data from China and the American Petroleum Institute.

Oil prices continue to extend their gains on Wednesday 01 July 2020, with US crude and Brent crude's August 2020 futures contracts hitting fresh highs of US$40.46 and US$42.50 respectively.

Crude oil prices supported by higher demand

Crude oil’s ongoing rally is underpinned by better-than-expected China Purchasing Managers Index readings, as well as a new American Petroleum Institute (API) report that showed a higher-than-expected draw in crude oil inventories last week, according to Daily FX strategist Margaret Yang.

China’s Caixin PMI for the month of June 2020 came in at 51.2 on Wednesday morning, surpassing market expectations of 50.5 and May 2020’s reading of 50.7.

Meanwhile, API’s weekly inventory estimates revealed a draw of 8.156 million barrels for the week ending 26 June 2020, well above analysts’ expectations for a draw of 710,000 barrels.

IG data showed that both WTI and Brent crude have increased over 7% and 5% since Monday 29 June 2020.

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What’s the short-term outlook for oil prices?

However, Yang cautioned that WTI crude oil prices may still face a strong resistance at US$40 a barrel in the near term, with energy demand possibly dampened by a resurgence of virus cases in the US.

On Tuesday 30 June 2020, the country recorded 47,000 new Covid-19 cases – the second highest one-day tally and the largest one-day increase since tracking began.

Yang further noted that oil prices could face more pressure, with the Organization of the Petroleum Exporting Countries and Russia planning to lower oil production cuts from next month - a decision she says is likely to weigh on crude oil prices as supply is set to increase.

On a technical basis, IG UK chief market strategist Chris Beauchamp wrote that further gains in WTI will mean a target $41.50 – equivalent to last week’s highs.

On the flipside, a more bearish view would require a reversal below US$37 a barrel, which would put the price back below a key area of support.

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