Oil's attempt to rebound has fundamental reasons

Today, oil is recovering from two sessions of active decline. There are several factors contributing to oil's rebound. The first one is a more optimistic forecast for China’s yearly oil demand from OPEC. Another reason is an increase in economic activity in China, meaning that the country's economy and demand are recovering.

Another important growth driver is an easing of distress in the U.S. banking sector. This could be seen in financial markets rising, and gold starting to weaken. The volatility index (VIX) has decreased and now is going back into its 'normal' range. 

VIX index

The Fed has provided an additional source of liquidity to bail out bank clients. Markets view this as a monetary policy easing.

According to forecasts, to limit the damage done to the banking system, the Fed is expected to start cutting rates. However, the Fed might also follow the 'separation principle', whereby monetary policy is viewed as a separate issue from the banking system and its sustainability. If this is the case, it'll weaken the commodity markets, which have recently come to believe that the Fed's monetary policy is being eased.

This is a downside for oil on the medium-term outlook. However, if the Fed continues to pursue its strategy, it'll give a reason to believe the Fed is in control of the situation and the banking problems are not undermining the U.S. economy. Thus, oil may return to its pre-crisis price zone.

As for the technical analysis, oil has moved down from the pennant, and the global downside targets lie in the area around $73. However, we cannot ignore the fundamental factors, which are now definitely pointing to a reverse in oil.

The current rebound could signal a reverse and mark an attempt to test the pennant from the bottom up. The oil price also rose above the recent bearish candlestick on the hourly chart, which is a bullish sign.

A growth target might be the previous consolidation, as well as the 0.618 Fibonacci level of the current wave of decline, which corresponds to the price of $80.75. A stop-loss might be placed at the renewal of oil's local lows near $76.80.

A decline in Brent oil price: 

Take profit – 80,75

Stop-loss – 76,80