Crude Check. What is the short-term outlook for crude?

As the US core inflation level rose to record levels, it is safe to assume that the interest rates are going to go up further. Thus, the fear of rate-hike induced recession, which can potentially translate to weak demand for oil, outweighed the impact of the production cut announced by the OPEC recently. This led to a fall in the crude oil prices over the past week which eroded more than half of the gains it made during the week before the last one.

The Brent crude futures on the Intercontinental Exchange (IEX) went down 6.4 per cent and the crude oil futures (nearest expiry) on the Multi Commodity Exchange (MCX) declined 7.3 per cent to end the week at $91.7 and ₹7,071 per barrel respectively.

Apart from the demand concerns, the US crude oil inventory data too weighed on the energy commodity. The data from the US Energy Information Administration (EIA) shows that the crude oil stocks went up by a significant 9.9 million barrels versus the expected increase of nearly 1.1 million barrels for the week ended October 7.

The fall also indicates that the recent rally could be just a knee-jerk reaction for the production cut announcement and the trend remains bearish.

Brent futures ($91.7)

Contrary to our expectation, the Brent futures on the ICE were not able to crack the hurdle at $100. In fact, the contract depreciated, and it is now below the minor support at $95. Nevertheless, the price level of $90 can offer support for Brent futures.

If there is a recovery on the back of $90, it can probably revisit $98. But note that only a decisive move past $100 can turn the outlook positive.

On the other hand, if the contract slips below $90, it will most likely fall towards $82.7 in the short run. A breach of this can intensify the sell-off as a move below that will confirm a lower low. In that case, a quick fall to $77 is very much likely.

MCX-Crude oil (₹7,019)

Since the October contract on the MCX will expire on Wednesday, we have taken November futures for our analysis. But there isn’t much difference in performance as the October series has lost 7.3 per cent, whereas the November contract depreciated 7 per cent.

Even though the November futures contract was down last week, it has managed to close just above the 50-day moving average support and also, the support at ₹7,000 stays valid. While this does not mean a rally is coming, traders should wait for the ₹7,000 to be breached before initiating fresh short positions.

Looking at the fund flow, last week was more sort of long liquidation as the cumulative Open Interest (OI) of crude futures on the MCX tumbled to 7,508 contracts as against 13,315 contracts by the end of the preceding week. Should there be a fall below ₹7,000, we expect fresh sellers to come in and consequently, the price can drop to ₹6,300 in the near term.

But if the contract recovers, it should be noted that there is a strong resistance at ₹7,600. A breakout of this can possibly change the short-term stance to bullish.

Considering the above factors, traders can now stay on the fence and can go short if November futures break below the support at ₹7,000. Place stop-loss at ₹7,400 and look for a target of ₹6,300.

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