Derivatives

Cup of woes spills over for oil

Gurumurthy K | Updated on March 10, 2018

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OPEC’s decision to maintain output has fuelled global glut fears



Crude oil has been hitting the headlines in the past week as its price has plummeted to the lowest level since 2009. The Organization of the Petroleum Exporting Countries (OPEC) on December 4 once again failed to kowtow to the market expectation that it will cut production. It decided to retain its minimum production target at 30 million barrels per day (bpd) and pump more than 31 million bpd.

Oil prices, which have been falling since July last year on concerns of oversupply, came under renewed pressure after OPEC’s decision last week. As a result, the West Texas Intermediate (WTI) Crude oil future on the New York Mercantile Exchange (NYMEX) has declined 13.3 per cent since December 3 to $35.62 per barrel and the Brent contract traded on the Intercontinental Exchange (ICE) is down 13.5 per cent and has closed the week at $37.93 per barrel.

On the domestic front the oil futures contract traded on the Multi Commodity Exchange (MCX) fell 13.9 per cent. It has closed the week at ₹2,403 per barrel on Friday. The MCX futures contract moves in tandem with NYMEX.

Higher output from both the US and OPEC nations, has kept the oil market oversupplied and prices under pressure for a long time now.

The latest data release from the OPEC show that in November OPEC output rose to 31.7 million bpd from 31.5 million bpd in the previous month.

Preparation to lift the sanctions on Iran earlier this year also fuelled oversupply concerns. According to a Bloomberg news report, the sanctions on Iran may be lifted early next year. The country is gearing up to increase its production by a million bpd to 3.8-3.8 bpd from its current production of 2.8 million bpd after the sanctions are lifted. While this news is already priced into the market, the overall situation suggests that the oil market is going to struggle with a glut, that doesn’t allow prices to recover from lower levels.

Medium-term view

Amid talk in the market about the possibility of the oil prices dropping to $20, we take a look at the charts to see where the prices may be headed.

The 10.9 per cent fall last week in the NYMEX Crude oil has dragged it below the important support at $40. An immediate, key trendline support is at $34.50. Inability to reverse higher from this support can push the contract lower to at $32.5 and $32 - a key long term support zone. Since the contract has been falling continuously, the $32.5-$32 support zone is likely to hold and halt the current fall.

A strong bounce from there can trigger a rally to $40. If the contract manages to rise past $40, then the corrective rally can extend to $45 or even higher.

But, a strong break below $32 will be very bearish and set up oil for a fall to $27.

On the domestic front, the MCX-crude oil futures contract has declined below the key support level of ₹2,500 last week. A rare occurrence of a head-and-shoulder as a continuation pattern is visible on the weekly charts. The formation of this pattern keeps the downtrend intact. The neckline resistance level of the pattern is poised near ₹2,535. A fall to ₹2,100 and ₹2,000 is possible in coming weeks. A further break below ₹2,000 can even take the contract to ₹1,850 thereafter.

An important medium-term resistance is at ₹3,400. Only a strong break above this hurdle will ease the downside pressure and negate chances for a further fall.

Short-term view

The strong fall below ₹2,500 after failing to break above ₹2,600 last week is a negative for the contract. Key short-term resistances are at ₹2,650 and ₹2,718 – the 21-day moving average. As long as the contract trades below these levels, a fall to ₹2,250 is possible in the short-term.

A strong break and a decisive close above the 21-day moving average will ease the downside pressure. Such a break will open the doors for the contract to rise to ₹3,000 and ₹3,200 thereafter.

Published on December 13, 2015

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