As central banks adopt a more hawkish stance, signaling a potential growth slowdown, oil prices continue to decline. However, positive factors such as rising oil demand in China and the US, decreasing rig counts, and observed support zones in the crude oil chart patterns provide hope for crude bulls.
By Bhavik Patel
Oil price continues to decline as hawkish commentary from Central banks around the world signals that growth is going to take a back seat and we might see more slowdown apparently as Central banks want to focus on bringing the inflation down at the cost of growth. During his second day of testimony before Congress, Powell remained fully committed to two more rate hikes this year after holding rates steady at the June meeting.
The Bank of England raised rates by 50 bps while the ECB raised rates by 25 bps. The Bank of England’s rate is highest since 2008 while Norway’s central bank also hiked by 50 basis points Thursday, raising its rate to a 15-year high of 3.75%. The Swiss National Bank raised its rate to 1.75% from 1.5% Thursday and said more rate hikes would come. More rate hikes from central banks are weighing on the global growth outlook and the market is purely focused on the consumption side and not supply side. Sentiment is therefore negative in crude. Europe’s PMI came lower than expected which is why we are seeing fresh selling sentiment in crude. Recession is not coming as expected which is why now investors are thinking that rate cuts from the Fed might come after March next year and not this year as previously expected.
But all is not lost for crude bulls as there are plenty of silver linings. China’s oil demand is on the rise despite mixed economic data from China. China has given small stimulus to jump start its economy but we are not expecting any more stimulus as that will increase inflationary pressure. However, increasing oil demand is positive. In the US, demand has reached the highest since December while inventory reported decline for the second straight week. Rig count is decreasing which means less production for Shale industries.
The biggest factor which is positive for crude is the chart pattern and support zone. We have seen in mid-march that 5400-5300 is proving to be good support where from there it had bounced till 6800. Next in the start of May and June both times, crude came near 5550 and bounced back till 6200 and 6000 subsequently. So in essence, 5550-5400 is proving to be strong support for crude in MCX and although it has not come in oversold regions, price action certainly suggests we are close to bottom. We would advise to wait for correction till 5550-5500 and one can go long with stoploss of 5300 and target of 5900 positional.
(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