MCX crude is in an overbought zone, its support emerged around Rs 6500. Whereas, oil prices rallied, backed by fundamentals.
By Bhavik Patel
After remaining range-bound for much of the second quarter, oil prices have mounted a significant rally, oil markets are finally waking up to the fact that fundamentals have tightened significantly. Crude oil prices posted a sixth straight week of gains on the back of a tighter market and easing recession fears. The recent rally is backed by fundamentals and what the market is anticipating is that there will be supply tightness going forward.
Prices which were correcting on Thursday mainly on profit booking saw strong reversal after Saudi Arabia will extend its 1 million bpd production cut till Sept and that these output cuts could be extended and/or deepened. Russia will also cut oil exports by 300,000 barrels per day in September according to the announcement from Deputy Prime Minister Alexander Novak.
Russia has already pledged to cut oil output by around 500,000 bpd from March until year-end. So we are seeing production tightness from OPEC+. US Shale is not helping the case either for bears as so far this year, Baker Hughes has estimated a loss of 120 active drilling rigs. Loss of rig count means US Shale won’t be able to extract more oil.
At the moment crude oil production levels in the United States stayed at 12.2 million bpd. U.S. production levels are now up 100,000 bpd versus a year ago but we won’t see any chance of further higher production. This means OPEC+ is the primary mover of the price and supplier to the world. OPEC are producing less as according to Reuters survey, they showed OPEC output fell 840,000 bpd from June levels while Bloomberg estimates OPEC’s crude oil production fell by 900,000 in July—the largest monthly drop since 2020 when OPEC slashed production due to fall in demand because of Covid.
Global demand meanwhile continues to remain strong. Global oil demand reached a record high of 102.8 million bpd in July so on one hand we have strong demand and on the other side we have dwindling production so the rally in crude prices is not surprising. Speculators and money managers have also rushed on the buy side as in the WTI contracts, the bullish bets increased by the equivalent of 65 million barrels between June 27 and July 25.In that same timeframe, bearish bets were slashed by 104 million barrels.
Until this week, highest open interest was in $85 WTI which amounted to around Rs 6995 in MCX and now highest open interest has shifted to $100 which amounts to Rs 8280 in MCX. We don’t believe the rally from $85 to $100 will be swift but there will be profit booking and correcting before reaching $100. Right now we believe $85 level and Rs 6995 in MCX is the first target and resistance.
Technical Outlook
In MCX, crude is in an overbought zone so any longs should be held with strict stoploss and expected target around Rs 6995. Support emerges around Rs 6500 and the main trend will only be under threat when Rs 6500 is breached on the downside. Fresh positions from the current juncture is not advisable as the market is in no mood for shorting while creating fresh long positions does not bode well if we look at risk/reward ratio. So we would be looking for creating short positions around the higher level of Rs 7000-7100 with expected downside target of Rs 6700 and strict stoploss of Rs 7200.
(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)
Source:financialexpress.com