Brent crude oil price slips after Israel-Lebanon ceasefire, but key risks remain

Brent crude oil price retreated to $96.7 today, June 4, as investors reacted to the new ceasefire between Israel and Lebanon. It remains about 16% below its highest point in May this year. Still, oil faces some major risks ahead despite the agreement. 

Brent crude oil price slips after Israel-Lebanon ceasefire

Israel and Lebanon agreed to reach an agreement that will end all hostilities raising hopes that the US and Iran will move forward to other deliberations. 

Iran has always insisted that any ceasefire should be regional, a move that Israel has rejected. Just this week, Israel’s Benjamin Netanyahu insisted that his country would continue with the attacks to fight Hezbollah after a fiery call with Trump.

This new ceasefire faces some major risks. First, it is contingent on Hezbollah halting its rocket and drone attacks against the Israelis. Second, the deal calls for the group to evacuate all its operatives from the South Litani Sector. 

All these are hard things to achieve since the Lebanese government does not control Hezbollah, which has become a powerful player in the country. As such, it is unclear whether the group accepts the deal. Besides, Lebanon and Israel have announced similar ceasefire agreements in the past. 

At the same time, based on Netanyahu’s statements, chances are that he will undermine the ceasefire agreement. His goal will be to push the US and Iran back to war, which he has been waiting for for four decades.

The agreement came in a highly difficult week. Talks between the US and Iran broke down, with Iran citing the happenings in Lebanon. The two sides also launched major attacks, with Iran bombing Kuwait’s main airport.

Meanwhile, oil traders are also reacting to the latest oil inventory data. A report by the Energy Information Administration (EIA) said that inventories dropped for the sixth consecutive week, reaching its lowest level since 2004. They dropped by 8 million barrels to 433.7 million barrels. A similar report by the American Petroleum Institute (API) said that inventories dropped by 6.75 million barrels.

Oil inventories may keep falling as the US is currently in its driving season, which normally starts after the Memorial Day weekend. It often leads to higher oil demand and a drawdown.

Brent crude oil price forecast

UKOIL price chart | Source: TradingView

The daily timeframe chart is sending mixed signals for crude oil prices. On the negative side, oil formed a double-top pattern at $114 and a neckline at $86. This pattern normally leads to more downside over time. 

Oil has also slipped below the 50-day and 25-day Exponential Moving Averages (EMA). These technicals suggest that oil may continue falling, potentially to below $60 by the end of the year. 

On the other hand, Brent has formed an island reversal pattern. This is a rare pattern characterized by significant consolidation after an asset gaps downwards. It resembles the abandoned baby candle, with the only difference being that it is made up of several candles. 

Therefore, Brent will likely rebound and move above the key resistance at $100. If this happens, it may fill the whole gap and move to $105. A drop below the lower side of the island reversal will invalidate the bullish outlook.