Why uptrend in crude oil is intact even after price dip

Akhil Nallamuthu |BL Research Bureau | Updated on: Feb 19, 2022

Explicit Illustration depicting the historic fall in the price of oil with an oil well in silhouette in the background | Photo Credit: pixinoo

MCX-futures has support at ₹6,400

Oil prices cooled down over the past week on the back of several factors. Taking centre stage was the pull back of some of the Russian troops from the Ukrainian borders early in the week, providing some temporary relief. Apart from this, the indirect talks between the US and Iran over the nuclear deal offered fresh ray of hopes as the possibility of restoring the 2015 deal i.e., JCPOA (Joint Comprehensive Plan of Action) looks increasingly likely. This means Iran could be relieved of sanctions and thus Iranian oil could flow into international market, increasing the supply.

Moreover, the latest US inventory data shows that crude inventory increased by 1.1 million barrels after two weeks of decline. These factors led to a first weekly decline in oil prices in the last two months. However, in his latest speech, US President Joe Biden has said he is convinced that Russia is set to invade Ukraine. Thus, the de-escalation in the region may not happen soon thereby keeping oil on the boil.

Brent crude

The spot price of Brent crude oil depreciated 1.5 per cent last week and closed at $94.09 per barrel. While it made a fresh two-week low of $90.55, it rebounded off that level. The price action in the past couple of weeks indicate that the Brent crude might be heading for a short-term consolidation phase with boundaries at $90.6 and $97. However, new developments with respect to Russia and Ukraine could induce fresh volatility in the coming week.

A breach of the support at $90.6 can result in extension of the corrective decline towards the support at $86.20. Though there is a minor support at $89. On the other hand, a breakout of $97 could mean bulls regaining traction which can lift the price to $100-mark swiftly. Subsequently, it can rally to $106.

MCX-Crude oil (₹6,730)

The continuous futures contract of crude oil on the Multi Commodity Exchange (MCX) lost 1.4 per cent last week. But one should note that the futures curve looks inverted as the price of the subsequent expiries are lower than the prior expiry. This can be seen from the closing price of March (₹6,730), April (₹6,625) and May (6,516) expiries on the MCX. An inverted futures curve is an indication of short supply in the market.

So, in the near-term, the crude futures (March expiry) is likely to retain the bullish bias and notably, it remains above a considerable support of ₹6,400. It is likely to rally past ₹7,000 and touch ₹7,400. A fortnight ago, we recommended longs and last week, we advised to carry the position. One can continue to hold these longs but adjust the levels based on March futures. Revise the stop-loss down from ₹6,450 to ₹6,350. On the upside, when the contract touches ₹7,150, exit one-third of the longs, and revise the stop-loss to ₹6,900. Book the remaining longs at ₹7,400.

Published on February 19, 2022
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