Asia Oil: Range trade mentality could set in until something breaks

The zig-zag price action last week was not that unexpected. Indeed, it’s a natural reaction to the speed of price recovery and the expected laborious toil of rebalancing the market, which was getting accentuated through the gnarly increase in Covid19 case counts and the bearish to consensus inventory builds. We know the builds came courtesy of the Saudi Armada, but this doesn't lessen the fact the economy still needs to chew through that glut.

Until we get a convincing downward pivot on the nationwide inventory metrics or a reversion on the three most populous US states’ virus case counts, traders could be prone to range trade mentality where WTI $35 is perceived to be the OPEC+ line in the sand and WTI $40+  is the level where traders currently think US production starts to ramp up.

Concerns about the recent uptick in Covid-19 infections in the US and a potential 'second wave' are weighing on oil at the moment. After the rapid rebound from the lows in April, it’s not surprising that investors have been quick to take profits on any hint of bad news.

US production issues will continue to thwart bullish market ambitions and could even be a negative near-term negative catalyst for oil. How long these dips will last remains to be seen, with underlying supply and demand fundamentals pointing to a more rapid rebalancing than had been expected even a few weeks ago.

Still, a higher level of volatility is likely to remain prevalent in oil markets for now, especially with Covid-19 making the primetime newsreels. And these headlines should continue revealing the fragility of confidence in the recovery for oil prices.

Last week the initial prompt was Wednesday’s comments from the Fed indicating its view of a slow recovery, while a rise in Covid-19 cases in the US as states easing mobility restrictions is seemingly compounding those specific concerns.

With all eyes trained on The Fed's Monetary Policy Report to Congress this week, oil traders could err on the side of caution early this week. And they could turn more prone to sell on rally just in case Chair Powell doubles down on his view that persistent fragilities remain in play while further playing into that range play mentality. derivatives are complex instruments and come with a high risk of losing substantially more than your initial investment rapidly due to leverage. You should consider whether you understand how over-the-counter derivatives work and whether you can afford to take the high level of risk to your capital. Investing in over-the-counter derivatives carries significant risks and is not suitable for all investors.