It’s unlikely that oil price will rise to May highs

Brent oil ended last week with a strong upward momentum of more than 2%. As a result, the price reached the range of 78–78.5, where the previous waves of growth in late May and early June ended. The chances of prices rising above this resistance are not so bad, but there weren’t any corrective pullbacks for 2 weeks now, so the attack on the 78.5 may start from lower levels.

Friday's rise in oil prices was driven by strong US labor market statistics. Although the number of jobs increased by slightly less than forecast estimates, market participants didn’t attach much significance to this fact. Also, the additional production cuts by Saudi Arabia went into effect, and the market is yet to see the result of it.

The current week started with much less pleasant news. Inflation statistics from China showed worsening demand problems in the world's second largest economy. While the rate of consumer price growth fell to 0%, manufacturing inflation dropped even lower (-5.4% in June, while in May it was -4.6%). Many countries would be happy with such low inflation, but for China it is a clear indicator of insufficient consumption of goods and services, which is negative for oil prices as well.

In addition to economic problems, China may reduce its oil purchases due to the growth of its own production. According to Bloomberg, this year the level of domestic oil production in China may rise to the record figures of 2015 — 4.3 million barrels per day. Thus, foreign suppliers of oil will have to either look for new markets or reduce prices.

The first pullback target for Brent oil price will be the level of 77. If the price falls to this level, it will lower overbought indicators, but at the same time the short-term uptrend won’t be broken out.

The following trading strategy can be suggested:

Sell Brent oil near the level of 78. Take profit — 77. Stop loss — 78.5.

Traders can also use a Trailing stop instead of a fixed Stop loss at their discretion.