The crude oil prices are on a rise as supply tightness continues to outweigh the demand concerns. Last week, the Brent crude futures on the Intercontinental Exchange (ICE) gained 5.2 per cent and the MCX crude oil futures (continuous contract) was up 4.8 per cent as they closed at $98.62 and ₹7,556 per barrel respectively.
Clearly the risks are inclined to the upside. G7 agreeing on a fixed price-capping mechanism for oil, the US sending out its last batch of nearly 200 million barrels of oil from the Strategic Petroleum Reserves (SPR) release announced in March, sanctions on Russia that come into effect on December 5 and the production cut by the OPEC are turning out to be the perfect recipe for a rally.
Apart from this, the latest data from the Energy Information Administration (EIA) shows that the crude oil inventories in the US dropped by 3.1 million barrels as against the expected increase of 80,000 barrels for the week ended October 28.
The above factors are tailwinds for the crude oil prices and overall, the probability of a rally from here looks high. The charts are also signalling a rally as the price action over the past two months indicates a base formation.
Brent futures ($98.62)
The Brent futures has now rallied into the resistance band of $98-100. Since this is a strong barrier, there is a chance for the contract to see a dip to $95. But then, we expect the contract to rally past $100 and touch $105 or even $110 sooner or later. Supporting this, the daily chart shows formation of a higher base.
MCX-Crude oil (₹7,556)
The November futures of crude oil on the MCX extended the rally last week. It marked a high of ₹7,592 before closing the week a little lower at ₹7,556. However, traders should be wary of the barrier at ₹7,600. Even as the trend can remain bullish, we cannot write off the possibility of the contract facing a corrective decline off ₹7,600 before the eventual break out of the same.
That said, the fund flow seems to be strong, and traders are likely to be betting for more rally. The cumulative open interest of crude oil futures on the MCX has increased to 8,675 contracts on Friday compared to 4,571 contracts a week ago. It was at 3,926 contracts on October 21. This shows that there has been a long build-up over the past couple of weeks.
On the back of this, if the contract breaks out of ₹7,600, we could see a swift rally to ₹8,000. But in case there is a corrective rally, we might see a dip in price, probably to ₹7,200, before rallying past ₹7,600. A decline below ₹7,000 is less likely.
Trade strategy: We suggested long positions at around ₹7,043 with stop-loss at ₹6,725 a couple of weeks ago. Target is ₹7,600. Although there are strong bullish signs, we advise traders to book profit at the current level.
One can rebuy MCX-Crude futures once the resistance at ₹7,600 is breached. For this, stop-loss can be kept at ₹7,400. Book profits at ₹8,000.