The crude oil prices surged till Thursday last week. However, post the rate hikes by the US Federal Reserve, the European Central Bank and the Bank of England, the price dipped on Friday. However, for the week, the energy commodity managed to end with a gain.
The Brent crude futures on the Intercontinental Exchange (ICE) was up 3.9 per cent as it closed at $79 a barrel. Similarly, the MCX crude oil futures (continuous contract) appreciated 4.5 per cent as it closed the week at ₹6,214 per barrel.
In addition to the central banks maintaining hawkish tone, the build-up on inventories in the US also weighed on the prices. According to the latest Energy Information Administration data, the crude oil stock in the US went up by a significant 10.2 million barrels as against the expected decline to 3.4 million barrels.
Technically, the bias is still bearish, and the recent price rally is most likely to be a corrective one.
Brent futures ($79)
Although the Brent futures rallied and produced a weekly gain, it remains below the important resistance level of $82. Also, it fell off the 20-day moving average last week. Therefore, until the price goes past $82, the inclination will be bearish. We expect the Brent futures to decline towards $65 in the short term.
MCX-Crude oil (₹6,214)
The December crude oil futures on the MCX rallied to hit an intra-week high of ₹6,433 on Thursday before losing some of the gains. It has ended the week at ₹6,214. This was in line with our expectation of the contract seeing a corrective rally.
Along with this price rise, the cumulative Open Interest (OI) of crude oil futures on the MCX dropped. The OI decreased to 10,683 contracts on Friday compared to 27,115 contracts a week ago. This is an indication of short covering.
But this does not mean that the rally can continue. Because the contract is facing some strong resistance ahead. Therefore, one can expect further drop from the current level.
Since the December futures is set to expire on Monday (December 19), we are giving the important levels based on the next month expiry — January series.
We forecast the January crude oil futures to drop to ₹5,000 in a month or two.
That said, if the contract decisively breaches ₹6,750, the short-term outlook will turn positive. Above ₹6,750, the resistance is at ₹7,000.
Trade strategy: We suggested short positions at an average price of ₹6,063 with stop-loss at ₹6,600 in December futures. Since we are headed for the expiration, we suggest rolling over the short position to January contract.
Maintain the 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.