Rising Covid cases in China has kept the demand for crude oil uncertain. The recent spike in cases has increased the fear of China tightening the curbs. This weighed on the prices of energy commodity last week. The Brent crude futures on the Intercontinental Exchange (ICE) lost 2.7 per cent and the MCX crude oil futures (continuous contract) was down 5.7 per cent as they closed at $95.87 and ₹7,124 per barrel respectively.
What also impacted the crude oil was a surprise increase in the US inventory. The EIA (Energy Information Administration) data shows that the crude oil stocks in the US increased by 3.9 million barrels as against the expected increase of 0.3 million barrels for the week ended October 4.
That said, the downside impact can be limited given that the supply is expected to go down in the coming months. Grossly, the bias remains inclined to the upside for crude oil prices.
Brent futures ($95.87)
The Brent futures, which dropped last week, found support at $92.35 against which it rebounded to close the week at $95.87. The 50-day moving average coincided with $92.35, helping the bulls to perform a recovery. However, the price action shows that the contract could be heading for a horizontal trend where it could oscillate between $92.35 and $100 in the near term.
MCX-Crude oil (₹7,124)
The November futures of crude oil on the MCX declined off the resistance at ₹7,600. It dropped below the key level of ₹7,000 briefly before ending the week at ₹7,124. There was a drop in the cumulative open interest of crude oil futures on the MCX — it dropped to 7,343 contracts from 8,675 over the past week showing that there was long unwinding.
But note that the contract has a support band in the price region of ₹6,800-7,000. Although we do not expect the price to drop below these levels in the coming week, the price action is hinting at the contract forming a sideways trend. That is, there is a possibility for the crude oil futures to stay within ₹6,800 and ₹7,600 in the near term. Resistance above ₹7,600 is at ₹8,000, whereas the immediate support below ₹6,800 is at ₹6,300.
Trade strategy: Although we expect the contract to stay within the price levels of ₹6,800 and ₹7,600, the fact that it is trading near the lower band of the region means one can go for long positions. The risk-reward also favours buys from here.
Nevertheless, rather than going long at current level, initiate buys when price inches down to ₹6,950 for a better risk-reward ratio. Add more longs when price touches ₹6,800. Place initial stop-loss at ₹6,670. When the price goes above ₹7,300, tighten the stop-loss to ₹7,100. Book profits at ₹7,600.