Post the announcement of a 75-bps rate hike by the US Fed last week, the dollar rallied to record levels. Surging greenback weighed on all commodity prices including crude oil. This resulted in the energy commodity hitting new lows. Brent futures on the Intercontinental Exchange (IEX) depreciated by 5.2 per cent to end the week at $86.6 a barrel. Similarly, the crude oil futures on the Multi Commodity Exchange (MCX) closed the week at ₹6,426 per barrel, losing 5.6 per cent.

Series of rate hikes by the central banks has been weighing on crude oil prices as the market fears that the aggressive lifting of rates could push economies into a recession, especially the US, potentially denting the demand for energy.

On the positive side, the gradual easing of lockdowns in China is expected to improve the demand for oil. Also, the increase in the US crude oil inventories was less than expected for the week ended September 16. According to the data by the Energy Information Administration (EIA) the crude stocks went up by 1.1 million barrels compared to the expected 2.5 million barrels.

However, it should be noted that the inventory has been on the rise for the past three weeks, adding 12.3 million barrels in the past three weeks against the anticipated rise of 2.4 million barrels. Should the inventories go up steadily, it can drag the prices down further. But be cautious that the referendum in the Russia occupied area of Ukraine is an upside risk.

Nevertheless, technical indicators largely remain negative for crude oil.

Brent futures ($86.6)

The Brent futures, which has been on a decline since mid-June, slipped below a rising trendline support last week. Also, it has decisively closed below the 38.2 per cent Fibonacci retracement level of the uptrend between April 2020 and March 2022 at $92.5.

Since $86 is a good support, the contract might see a minor rally from here even though the major trend is bearish. Probably, it can retest the support-turned-resistance level of $95. Subsequent resistances are at $100 and $105. But eventually, the Brent futures will resume the downtrend and fall below $86. It could also extend the fall to the support band of $78-80 in the short term.

The trend will turn bullish only if the resistance at $105 is breached. In that case, the contract can rise to $115, which is a considerable barrier.

MCX-Crude oil (₹6,426)

The MCX crude futures lost 5.6 per cent last week and along with this, there is a sharp rise in the cumulative OI of the futures. That is, the price dropped to ₹6,426 on Friday compared to ₹6,810 a week ago and the OI shot up to 11,907 contracts from 7,489 contracts in the corresponding period. The OI stood at 4,534 contracts by the end of the final week of August — just before the current leg of the downtrend began.

While more participants coming in as price declines can indicate more to the downside, the MCX crude futures is currently testing a rising trendline support which can offer temporary relief. That is, even as the broader trend is negative, we might see a corrective rally from here which can take the contract to ₹7,000. Yet, a rally beyond this level is highly unlikely.

On the downside, the contract is expected to fall below the nearest support at ₹6,300 and decline to ₹5,550 in the near term. The price level of ₹5,550 is a strong base against which the MCX crude oil futures could see a bounce.

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