Crude oil prices whipsawed last week as reports emerged that Saudi Arabia is considering an output increase, which they later denied. This spurred volatility in oil prices and going ahead the prices might depreciate as supply concerns are easing on one hand and on the other, increasing Covid cases in China are a major source of worry with respect to demand.
Broadly, the impact was negative on prices last week. The Brent crude futures on the Intercontinental Exchange (ICE) slumped 4.5 per cent, as it closed at $83.7 a barrel. Similarly, the MCX crude oil futures (continuous contract) lost 3 per cent, as it closed the week at ₹6,311 per barrel.
The decline in price was despite the latest EIA (Energy Information Administration) data showing a drop in the US crude oil inventory — the crude oil stock came down by 3.7 million barrels versus the expected drop of 2.5 million barrels for the week ended November 18. However, there are reports about the inventory going up last week, which could have weighed on the prices.
Not just the fundamentals, the charts as well are now indicating a clear bearish bias and as it stands, the probability of further fall is high.
Brent futures ($83.7)
The Brent futures extended the decline last week and closed at $83.7, losing 4.5 per cent. Since it has dropped below the support at $85, the chances of the contract dipping further is high. From the current level, the nearest support is at $76. A breach of this level can take the price lower to $65.
MCX-Crude oil (₹6,311)
The short build-up on MCX-Crude futures continues as last week, the outstanding Open Interest (OI) increased along with a drop in price. That is, even though the contract rallied initially, it could not rally beyond ₹6,750 and fell sharply to close the week at ₹6,311. Thus, the December futures slipped 3 per cent. The cumulative OI increased to 18,805 contracts on Friday versus 16,028 contracts by the end of the preceding week. Notably, it stood at 7,343 contracts on November 11. Therefore, the short build-up has been occurring over the past couple of weeks.
Nonetheless, the contract has a support at ₹6,300. While a breach of this can intensify the sell-off, traders can wait for the price to fall below ₹6,300 before initiating fresh short positions. A break of ₹6,300 can result in a quick fall to ₹6,000. On the other hand, if there is a rally form here, ₹6,750 and ₹7,000 will be key hurdles.
Trade strategy: As mentioned above, the MCX crude oil futures has an important support at ₹6,300. Therefore, one can consider fresh shorts if the price drops below this support ₹6,300. Keep initial stop-loss at ₹6,520.
When price slips below ₹6,000, revise the stop-loss down to ₹6,200. On a dip to ₹5,750, book half of your shorts and modify the stop-loss to ₹5,950. Exit the remaining at ₹5,600.