Crude Check: Oil rally might be limited

Crude oil prices gained last week on the back of the capping the price of Russian oil and the dollar weakness. Besides, in the US, the draw of the energy commodity from the inventories was higher than expected for the week ended November 25. According to the Energy Information Administration, the crude stocks in the US fell by 12.6 million barrels against the expected drop of nearly 3 million barrels.

Consequently, the Brent crude futures on the Intercontinental Exchange (ICE) gained 2.2 per cent, as it closed at $85.6 a barrel. Similarly, the MCX crude oil futures (continuous contract) was up 3.8 per cent, as it closed the week at ₹6,548 per barrel.

However, the crude oil may not be able to ride higher as the price cap on Russian oil, which is fixed at $60 by G7 countries and the European Union, is higher than the current market price of the Russian Ural crude. Therefore, the supply will continue to flow and worry of a crunch has subsided.

That said, the outcome of the OPEC+ meet on December 4 need to be closely monitored as any significant measures from them can impact the supply-demand dynamics considerably.

Brent futures ($85.6)

Even though the Brent futures rallied last week, it was unable to crack the resistance band of $88-90. While the rally is likely to be capped, the contract is finding support at $82. Therefore, there are chances for Brent futures to consolidate between $82 and $90 in the short term. Resistance above $90 is the price region of $98-100. Support below $82 is at $76 and $65.

MCX-Crude oil (₹6,548)

As the crude oil prices rallied, there were considerable levels of short covering on the MCX contracts last week. The December futures rallied 3.8 per cent, whereas the cumulative Open Interest (OI) dropped to 10,984 contracts from 18,805 over the last week. A rally in price along with a drop in OI indicates shorts were being covered.

Nevertheless, this is not an indication of a bullish reversal as the contract continues to stay below the key hurdles at ₹6,750 and ₹7,000. A breach of ₹7,000 can probably change the short-term outlook bullish. That said, the support at ₹6,300 continues to stay good despite the considerable selling pressure during the second half of November. Although the December contract made a low of ₹6,052 on Monday, it recovered sharply to close the session above ₹6,300. What followed was a rally.

So, broadly, unless the contract breaches either ₹7,000 or ₹6,300 on a daily close basis, we cannot assume the next leg of trend with certainty.

Until then, traders can consider range-trading strategies.

Trade strategy: On the back of the resistance at ₹6,750, one can risk going short at the current level of ₹6,548 for this week. Consider adding shorts if the price moves up to ₹6,725 and place stop-loss at ₹6,820. When price drops below ₹6,400 revise the stop-loss to ₹6,625. Exit the shorts at ₹6,300.

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