Triggered by growing fears of recession, crude oil prices plummeted over the past week. The Brent crude futures on the Intercontinental Exchange (ICE) plunged 10.4 per cent as it closed at $76.6 a barrel. Similarly, the MCX crude oil futures (continuous contract) tumbled 10.3 per cent as it closed the week at ₹5,876 per barrel.
The price fell despite the inventory drawing in the US being more than expected. The latest data by the Energy Information Administration shows that the oil inventory declined 5.2 million barrels for the week ended December 2 as against the expected drop of 3 million barrels.
In other news, OPEC, in their last meeting held on December 4, decided to stick to their existing policy with respect to oil production cut by 2 million barrels per day, which is about 2 per cent of total global oil demand, from November until the end of 2023.
On the other hand, technically, oil prices have now fallen below a key support level and are likely to trade with bearish bias going ahead.
Brent futures ($76.6)
Facing the 20-day moving average resistance, the Brent futures on the ICE fell sharply last week. As it closed at $76.6, it has invalidated the support at $82. The price action is bearish. Going forward, the contract might rise to retest $82. But eventually, it is likely to decline towards $65. The short-term trend will turn bullish only if $90 is decisively breached.
MCX-Crude oil (₹5,876)
The December crude oil futures on the MCX fell through the last week losing 10.3 per cent to close at ₹5,876 versus the preceding week’s close of ₹6,548. Thus, the contract broke below an important support at ₹6,300 and it has also closed below ₹6,000.
Along with price drop, the cumulative Open Interest (OI) of crude oil futures on the MCX shot up to 27,115 contracts on Friday compared with 10,984 contracts by the end of the preceding week. This shows considerable short build-up.
Thus, crude oil futures will probably see further decline from here. Although it might witness a corrective rally from here, possibly to retest ₹6,300, we forecast the contract to eventually fall towards ₹5,550, its nearest notable support. Subsequent support is the price band of ₹4,850-5,000. Only a strong break above ₹6,800 will change the bearish inclination.
Trade strategy: Traders can initiate fresh short positions at the current level of ₹5,876. Add more shorts if the contract sees a rally to ₹6,250. Place initial stop-loss at ₹6,600. When the price drops to ₹5,550, liquidate one-third of the shorts and then revise the stop-loss to ₹6,000 for the remainder of the positions. When price falls to ₹5,200, tighten the stop-loss further to ₹5,500. Exit all the shorts at ₹5,000.