Oil markets looking for the right leg to stand on

The strong rally in oil markets - which was kicked off in late June by geo-political concerns regarding Syria, Iran and most recently Iraq, together with lost supplies from a Norwegian oil strike - seems to have run out of steam as the macroeconomic sentiment continues to deteriorate.

The sanctions against Iran have proved very effective so far and exports from the country with nuclear aspirations have slowed to a trickle, removing an amount equal to what was lost during the Libyan conflict in 2011. The escalating tensions in Syria and the failure by the international community to halt the bloodshed have also unnerved the oil markets. All in all this leaves the global oil market with less supply at a time of seasonal peak demand, and it has helped the price of Brent crude, the global benchmark for more than 50 percent of physical transactions, to recover almost half of the March to June sell-off.

The combination of strong resistance at the 50 percent retracement level and a returned focus on the fragile global economic outlook have, however, halted further price advances this week. Especially the deteriorating macroeconomic situation in the Europe over the last few days which have seen Spanish government bond yields surge and stock market slump have caused a pause in the general advance of commodities and oil especially.

Economic data from China has improved slightly recently, but at the same time oil imports in June was down 12 percent from May which could signal that the rush to fill commercial and strategic reserves have begun to slow as they fill up. The building and filling of strategic storage facilities has been a Chinese aspiration, in order to bring its forward cover closer to 90 days which is what OECD nations generally have.

Speculative investors who got badly burned during the June slump on overextended long positions have only slowly begun to rebuild long exposure, following a 73 percent reduction in money managers holding of bullish positions in Brent crude and a 46 percent reduction in the non-commercial holdings of WTI crude long positions. This could indicate some hesitancy in getting too bullish at this stage, with the 100 dollar level on Brent being the most likely area around which oil will trade while the market works out which side of the equation has the strongest pull. Is it the potential for lower demand as economic activity slows, or the impact of from tightness in the physical market from reduced supply?