Oil Inches Higher on Expectations of a Decline in U.S. Inventories

After six-days of losing streak, WTI crude oil rose for third straight session on Tuesday and moved back above $50.00/barrel psychological mark. Board based US Dollar weakness and rising equity markets, on fading expectations that the UK will leave the European Union, is further seen supporting global risk-on rally and benefitting oil prices on Wednesday.

Oil rises as inventories fall

Following an initial dip to the boundaries of $49.00, the commodity rallied beyond $50.00 after data from the American Petroleum Institute (API) reported a larger-than-expected drop in inventory levels of US crude oil. Inventories declined by 5.2 million barrels for the week ended June 17 as against an expected fall of 1.7 million barrels.

Oil prices continued to climb higher ahead of the official weekly EIA report, scheduled for release later during NY session, which is expected to show a decline of 1.2 million barrels in US crude inventories.

Oversupply has been acting as a key barrier for oil prices as resumption of oil production after Canadian wildfires and rising output by Iran and Iraq added to worries of a global supply glut. Declining US crude stockpiles seems to ease concerns over a global supply glut and is supportive for crude oil prices’ uptrend.

Weak US Dollar supporting bullish momentum

Moreover, cautious remark from the Federal Reserve Chairwoman Janet Yellen, during her testimony on the Semiannual Monetary Policy Report before the Senate Banking Committee on Tuesday, is weighing on the US Dollar. Adding to it, bullish sentiment surrounding Thursday’s UK-EU referendum also seems to dent the safe-haven demand for the greenback and is extending support for dollar-denominated commodities – like oil.

In the near-term, oil traders will keep a close eye on developments surrounding the crucial ‘Brexit’ referendum that will decide UK’s membership in the European Union. On a fresh bout of safe-haven buying, especially in the US Dollar, traders are likely to move away from riskier assets and exert selling pressure in commodities, including oil.

 Technical outlook

From current levels, a sustained move above $50.45-50 resistance seems to trigger a fresh leg of up-move for the commodity immediately towards recent swing highs resistance around $51.50-60 region. A follow-through buying interest would open room for resumption of the strong bullish momentum, assisting oil to head towards its next major resistance around $53.40-50 area.

Meanwhile, a profit taking move back below $50.00 handle and a subsequent drop below $49.75-70 horizontal support is likely to drag it back below $49.00 handle towards testing Tuesday’s low support near $48.80-75 zone before dropping further towards its next major support around $47.75 region.