The oil price is likely to be extremely volatile in the coming days as we get the outcome of the US Federal Reserve meeting, the ECB meeting in Europe and Non-Farm payrolls in the US. These will all have huge implications for oil and for commodities in general.
Brent crude oil has managed to hold onto its recent gains even though it has been range-trading for most of this month. $108.00 appears to be a double top and has so far acted as a key resistance zone for this pair, while $104.00 has supported prices on the downside. If central banks pump more liquidity into the economy, or the ECB manages to stabilise the sovereign debt crisis then we could see oil rise further and test that $108 level once more. However, if central banks are seen to disappoint the markets then we could see sharper declines across the whole of the commodity space.
Interestingly, the commodity index, the Thompson Reuters/ Jefferies index, has started to fall even though oil continues to rise. This is unusual since the commodities index tends to move in the same direction as oil. Hence this could be a sign that commodities prices may struggle to rally going forward, which could be bad news for oil.
Thus, we recommend that oil traders take a defensive stance in the coming days – booking profits where they can and ensuring they use stop-losses to protect their downside in case of a sell-off. Good support in Brent crude lies at $102.80 then at $100.25 – the 50-day moving average.
(Kathleen Brooks, Emea Research Director at FOREX.com)