MCX Crude futures trend looks weak, support at Rs 7200/bbl, wait for the prices to settle down

By Bhavik Patel

WTI Crude started August on the decline, following the first back-to-back monthly losses in June and July since the end of 2020. Oil prices have plunged by more than 7% since the start of August. Currently the sell off in crude oil is on back of expected weak demand as recession looms over the world economy. We have seen weak factory data from US, Europe and Asia. US 10 yr and 2 yr Treasury yields inversion is pointing to upcoming recession. OPEC+ have also lower their forecast for crude demand in second half of the year. Inflation will be key for crude oil prices because if inflation persists, the US will continue to hike rates pushing the economy into recession. 

China continues to have its own economic troubles and lately china has also cut back its demand for crude on account of lockdown. However not everything is negative for crude oil as oil demand could find support from record high natural gas prices, which are prompting industrial consumers to switch to oil-fired generation. Last week, Germany restarted two of its oil burning power plants in a bid to reduce gas consumption so we may not see WTI prices sustain below $83. Even if it touches $83, it won’t be able to sustain there and will bounce back around $92.

OPEC+ meeting got concluded with group decided to raise production targets for September slightly, by 100,000 bpd. With a compliance rate of more than 300%, OPEC+ is unlikely to reach that target. The group, collectively known as OPEC+, had been increasing production by about 430,000-650,000 bpd a month but has struggled to hit full targets because most members have already exhausted their output potential. 

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WTI Crude is at its critical support of $89. If it closes below $89, then next support comes at $83 which we think will hold as despite weak demand, there is tightness in the market. On the MCX daily chart, crude is at its support area of 7200 where the 200-day moving average is. Next support comes around the area of 7000 which was low made around in April 2022. Trend is weak but prices are not in the oversold region as RSI_14 is at 36. So there is further room on the downside. We believe further shorts from here on would be risky looking at risk/reward ratio as prices have already fallen from 9000 to 7200 in the matter of one month. So wait for prices to settle around Rs.7000-7100 and then traders can start accumulating around that zone with a strict stop loss of 6800 and expected target of 7500.

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