The zig-zag price action last week was not that unexpected.

Indeed, a natural reaction to the speed of price recovery and the expected laborious toil of rebalancing the market, which was getting accentuated through the gnarly increase Covid-19 case counts in three of the most heavily populated states and the bearish to consensus inventory builds.

We know the builds came courtesy of the Saudi Armada, but this doesn’t lessen the fact the economy stills need to chew through that glut.

Until we get a convincing downward pivot on the nationwide inventory metrics or a reversion on the three most populous US states virus case counts, traders could be prone to range trade mentality where WTI $35 is perceived to be OPEC + line in the sand, and +WTI $40 is the level where traders currently think US production starts to ramp up.

Concerns about the recent uptick in Covid-19 infections in the US and a potential ‘second wave’ are weighing on oil at the moment. After the rapid rebound from the lows in April, it is not surprising that investors have been quick to take profits on any hint of bad news.

When it comes to Covid-19 and consumer behaviour, it is fear that matters.

Oil trader will continue to keep one eye trained on the Covid-19 case count headlines as case count rise globally. Economically, the virus has never mattered much – it is fear of the virus that matters (either policymakers’ fears or consumers’ fears).

US production issues will continue to thwart the bullish market ambitions and could even be a negative near-term catalyst for oil. How long these dips will last remain to be seen, with underlying supply and demand fundamentals pointing to a more rapid rebalancing than had been expected even a few weeks ago.

Still, a higher level of volatility is likely to remain prevalent in oil markets for now, especially with Covid-19 making the prime time newsreels. And these headlines should continue revealing the fragility of confidence in the recovery for oil prices.

So far, there does not seem to be an increase in fear alongside the increase in infections. Credit card and mobility numbers are showing improving economic trends. This may change if the infection rates continue to increase, of course, but for now fear seems to be contained.

Last week the initial prompt was the Wednesday comments from the US Fed indicating its view of slow recovery, while a rise in Covid-19 cases in the US as states easing mobility restrictions is seemingly compounding those specific concerns.

With all eyes trained on The Fed’s Monetary Policy Report to Congress this week, oil traders could err on the side of caution early this week. And they could turn more prone to sell on rally just in case Chair Powell doubles down on his view that persistent fragilities remain in play, while further playing into that range play mentality.

Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp