MCX crude September futures trade below 200-DMA, support seen at Rs 6800/bbl; trend looks bearish

By Bhavik Patel

WTI rallied almost 3.5% on Thursday after trading at a 6 month low as there is worry of tight supply. For the past 2 months, oil prices are falling steadily on account of recession fears. U.S. crude oil inventories, excluding those in the SPR, are now just 425 million barrels, 6% below the five year average. Gasoline inventories are 8% below the five-year average, and distillates are 23% below the five-year average.One of the major reasons along with recession fears for steadily falling crude oil prices are supply news. At the start of the invasion, Europe was quick to shun Russian oil and prices skyrocketed fearing supply constraints. However Russian oil is now flowing to Asia namely China and India while Middle East oil which was prior flowing to Asia is now going to Europe. So despite the invasion and sanctions, there is no supply constraint of crude oil.

With supply sorted out, demand comes into focus. The present fall has come after economic data from China were released. China’s central bank cut lending rates to revive demand as data showed the economy slowing unexpectedly in July. Europe’s data is weak with the UK entering into recession and the US just chugging along. IEA and OPEC have both forecast weak demand this year and prices have reacted to that.

However, everything’s not lost for oil bulls. There is a case for short-term bullishness as the hurricane season starts in the United States, where storms and hurricanes could force shutdowns at Gulf of Mexico production platforms. Furthermore, the release of oil from the strategic reserve is also coming to an end (Sept), which can reduce supplies. US Shale producers have failed to listen to their president and instead rewarding their shareholders by distribution dividends and buying back their shares instead of investing in new oil wells. So in future, there is less chance of US production increasing. OPEC+ have already resisted calls for increasing production so we may not see glut in future.

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Going forward, the main factor that will determine oil price direction is economic growth. Currently traders are not bullish as net long speculative positions have dropped and premiums between current and next contract are shrinking indicating the market is not expecting tightness of supply.

In MCX, September crude futures prices are trading below the 200-day moving average on daily scale indicating bearish trend. Momentum oscillator RSI_14 is at 43 so there is room for the downside. Since the last 20 days, prices have failed to close above the 20-day moving average. Next resistance would be the 50-day moving average at 7770. Support is at last week’s low of 6800. We would advocate going long above 7400 only once prices have convincingly breached its resistance with the target of next resistance at 7750 and stoploss at 7200.

(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own.)