Brentprice failed to break above the $70 level on Wednesday, as buyers' appetite isstill constrained by some demand risks. Concerns about demand in India as wellas expectations that OPEC will soon begin to lift output restrictions weigh onprices. Recovery of Iranian supply also makes growth more cautious. Although itnow seems that the market will be able to absorb new supply, there are risksthat the outlook for demand will become less optimistic, which will lead to a morefragile balance in the market.

SaudiArabia has announced its June OSP prices and, given OPEC's concerns aboutdemand and upcoming production increases, prices for Asia have been cut anadditional 10 cents. The Saudis have also lowered prices for other regions, forexample for Europe the over-benchmark premium has been reduced in all grades.However, US prices have been raised. The multidirectional movement of pricediscounts for different regions suggests that OPEC evaluates the prospects fora recovery in demand in different ways, and also takes into account differentlevels of risks.

TheEIA report showed that oil stockpiles in the United States fell by 7.99 millionbarrels in the reporting week, which significantly exceeded the forecast of -2million barrels. This strong decline was driven by several factors, inparticular increased capacity utilization rates of refineries. Now it is at itshighest level since March last year. Oil exports increased by 1.58 mln bpd to4.12 mln bpd. Only four times in history US oil exports topped 4 million bpdwhat looks like an indication of a really strong near-term oil demand picture,especially for US supply.

Technically,the corrective rally in oil after breakout of the key trend line took place ina narrowing channel, which indicates a keen buying pressure. The priceapproached the March high however potential breakout of the main resistanceline is likely to be short-lived (false breakout), since risks in the newsbackground are shifted towards neutral and negative events (growth in Iranian output,US shale oil recovery, planned increase in production OPEC, etc.). Most of thepositive on the demand side has already been priced in by the market in one wayor another:

Yesterdaydata on ADP and ISM in the US were not as strong as expected which became amajor disappointment. The growth of jobs according to ADP was 742K (forecast800K), the ISM index did not live up to expectations:

Withthis data in mind, optimism about Friday's NFP declined. This eased pressure onlong-term yields and the dollar. The yield on 10-year US Treasuries retreatedas less strong labor market growth would mean less acceleration in inflation –the biggest threat of real bond returns currently:

It isclear that the risk of a weaker NFP report has risen, so the markets couldstart to brace for a negative surprise on Friday. If the report does turn outto be so, the bearish trend in the dollar is likely to resume, as moreinconsistencies will appear in the story with higher inflation in the US.

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