Commodity Call. Is the worst over for crude oil?

There was increased buzz in the markets last year about crude oil prices plummeting to $20. For those waiting for this fall, the sharp 51 per cent rally in the oil price from a multi-year low of $26 would have come as a surprise. In December, in these columns, we had predicted a fall to $27 on the West Texas Intermediate (WTI) crude oil future on the New York Mercantile Exchange (NYMEX) if it breaks below an important long-term support at $32. The contract, indeed, fell to a low of $26 in February and has since jumped back over 50 per cent. Last week, the contract made a high of $41.2 on Friday before closing at $39.44

The domestic futures contract on the Multi Commodity Exchange (MCX), which moves in tandem with the NYMEX, has risen 47 per cent from its February low of ₹1,805 per barrel to ₹2,648 now. The strong rupee has restricted the rally in the domestic contract.

The major trigger for this price reversal came from a few top oil producers deciding to freeze their output. Last month, Russia and Saudi Arabia announced a cap on their production to their respective January levels. This move may not help in curbing the oversupply, because, according to reports, the January production level of both the countries stands at around 10 million barrels per day (bps).

But the market took this development as a signal of more production cuts in the future. The prices were boosted further last week as the US dollar plunged after the Federal Reserve Meeting. The US Fed last week indicated only two possible rate hikes this year as against an expected four rate hikes in December 2015. This had the dollar index plummeting 2.5 per cent from a high of 97 to 94.6 last week. A weak dollar is a positive for oil as it becomes cheaper to purchase.

Market experts, including the Russian Central Bank, consider the current oil price rise as unsustainable. It could be if the oil producers meeting scheduled for next month fails. The Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members are meeting on April 17 to strike a deal on capping the production limit. Iran which is gearing up to boost the output after the sanctions were lifted, is the only key producer which has explicitly refused to freeze its output. Also, some producers have said that they would support the deal only if Iran agrees.

The threat of supply increase from Iran is already priced into the market. So, any negative impact from this meeting could be short-lived. Whatever be the outcome of this meeting, charts are giving early signs that the worst could be over for oil prices. Though a sharp rally to $100 may not be seen once again in the near term, the threat of fresh low also looks unlikely from the charts.

Strong supports at $35 and in between $34 and $32 for the NYMEX contract are likely to limit the downside in case of any sharp reversal in the price. Also, a break below $32 looks less probable on the charts.

The 200-day moving average resistance is ahead at $42.5. A pull-back from here can see a short-term fall to $40 or $39. But an eventual break above it can test the 55-week moving average at $45.5 there after. If the contract manages to break decisively above $45.5, then there is a strong likelihood of the rally extending to $50. This level of $50 is a very important long-term trend support-turned-resistance level, which could cap the upside. But that said, the possibility of the rally extending beyond $50 in oil is unlikely at the moment.

On the domestic front, the inability of the MCX contract to decline below ₹2,000 in January and February is a big positive. This suggests fresh buying interest in the market around this psychological support level. So, there is no threat of seeing any fresh fall in the contract as long as it trades above ₹2,000.

The MCX contract has support at ₹2,450 — the 21-week moving average and then at ₹2,350. The 21-day moving average is on the verge of crossing over the 100-day moving average. This is a positive signal, suggesting that the up-move is likely to continue. A strong break above the 200-day moving average resistance at 2,800 can take it to ₹3,000 and ₹3,200 in the short term. A further break above ₹3,200 will see the rally extending to ₹3,500 in the medium term.

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