Oil prices took a beating last week and from $52 it tumbled to $43.50. Oil market got stirred up after fears surrounding Organization of the Petroleum Exporting Countries’ (OPEC) deal to cut production among its members; another contributor to the price decline was the US inventory oil data released last week. Crude prices right now are being held back on lingering doubts over the ability of OPEC and oil producers to agree on planned output cut. The next OPEC meeting is to be held on November 30.
According to CNBC, the World Bank raised its crude oil price forecast for 2017 to $55 a barrel from $53 a barrel, as it expects an output agreement among the (OPEC) to help trim excess supply.
Large speculators and traders sharply trimmed their net positions in the WTI crude oil futures markets to the lowest level in five weeks, according to the latest Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC). The speculative decline in oil bets indicates speculators are not bullish in holding long position and oil market may consolidate around this range. One of the other reasons for decline in crude oil prices are the upcoming US presidential election.
Crude oil is a risk asset. It generally gains when economic growth and demand prospects look good. To cement the breakdown of crude further was the report from Baker Hughes that the North American rig count raised for the fifth straight week to 553. This figure was 37 per cent higher than the low of 404 in late May. When crude oil prices were trading higher around $50, drilling count was also increasing. Drillers are expecting more business in 2017. The rig count has resumed its rise, which is a negative long-term indicator but it is still well below last year’s level. There is silver lining for crude oil as in order to compensate for its falling domestic oil production, China has substantially increased its oil imports this year. The import is expected to increase in 2016 and 2017 which will support oil prices.
In MCX, Crude oil has taken support at its 200 EMA (Exponential Moving Average). In fact, it has created double bottom when in September it made low at Rs 2873 and recent low of Rs 2917. Looking at technical chart, crude oil is poised to head north and may move till Rs 3150. The correction seems to be overdone and slowly crude oil may resume its uptrend despite fundamental negative news of higher inventory and rig count. Risk and reward ratio is fair too with stop loss coming at the recent low of Rs 2900 and target of Rs 3150 which is 50 percent retracement taken from the high in October. Traders are advised to create long position with stoploss of Rs 2900. If crude oil breaches Rs 2900, then we may see correction till Rs 2650. Any more ammunition for Crude oil will come after November 30 if OPEC decides to halt production or cut its production.
The author Aasif Hirani is Director, Tradebulls