Crude oil prices slumped last week and have begun the year on a weak note. The Brent futures on the Intercontinental Exchange (ICE) declined 8.6 per cent to end the week at $78.5 per barrel. Likewise, the continuous contract of crude oil on the Multi Commodity Exchange (MCX) tumbled 6.2 per cent to close the week at ₹6,149 a barrel.
Inventory build-up in the US weighed on the prices last week. According to the Energy Information Administration (EIA), the crude oil stocks in the US shot up by 1.7 million barrels for the week ended December 30, which was higher compared with an increase of 0.7 million barrels in the preceding week. Moreover, the latest data showed that the Manufacturing and Services PMI in the US were in the contraction zone, raising the demand concerns.
On the charts too, the bearish bias is very evident as both Brent and MCX futures have formed a lower low after falling off a resistance level. The possibility is high to see more fall from here.
Brent futures ($78.5)
The Brent futures declined after facing a roadblock at $87. Also, $85 is a resistance level. Now it has fallen back below $80-mark and the nearest support from the current level is seen at $76. Given that the overall trend is weak, the contract might drop below $76 and head south towards $65. On the upside, a rally beyond $85 is difficult.
MCX-Crude oil (₹6,149)
The January futures of crude oil plummeted on the back of the resistance at ₹6,750. In addition to this, the presence of the 50-day moving average at around ₹6,700 helped the bears’ cause.
Notably, the contract has closed below the ₹6,200 support, opening the door for further depreciation. There is significant short build-up as the cumulative Open Interest (OI) of crude oil futures increased to 11,610 contracts from 6,138 contracts over the past week. This strengthens the bearish case and increase the probability of more downside.
The contract is likely to slip below the support at ₹5,900 and decline to ₹5,600 in the near term. A breach of this level can result in a fall to ₹5,400.
On the upside, the contract has a resistance at ₹6,400 and another strong one at ₹6,750. For the bulls to stand a chance against the bears, the prices should rise decisively above ₹6,750. Until then, bears are expected to dominate.
Trading strategy: One can consider initiating fresh short positions at the current level of ₹6,149. Add more shorts if the price moves up to ₹6,400. Place stop-loss at ₹6,750 at first. Revise it down to ₹6,050 when price falls below ₹5,900. Tighten it further to ₹5,900 when the contract goes below ₹5,750. Exit the shorts at ₹5,600.