Crude futures have almost doubled since the 13-year lows of $27 for Brent and $26 for WTI in the first quarter. In MCX too, it rallied from Rs 1,805 to Rs 3,442 giving an impressive 90 per cent return in 4 months. Meanwhile, after a three-session climb to the highest level in almost 11 months, oil futures pulled back last week as investors raised concerns that the recent price rally would prompt higher production. Prices bounced off those lows on talk of an OPEC production freeze, which did not materialise.
The rally heightened after last month’s wildfires in Canada’s oil sands region and also has been supported by supply outages elsewhere, including Nigeria, Venezuela and Libya. Also companies have slashed spending on new drilling. The fact is, technicals can drive the market for a while, but sooner orlater the fundamentals are going to give us the price direction. Oversupply remains an issue, as Iran pumps more oil into the world market and other nations continue to produce at high levels. The US crude oil rig count peaked at 1,609 in October 2014. On the other hand, it hit its lowest level of 316 for the week ending May 27, 2016. The count is at its lowest level since the 1940s.
The number of rigs drilling for oil in the US rose by nine last week, second increase in 11 weeks. In addition, the number of rigs drilling for oil and natural gas in countries excluding the US and Canada rose in May compared with April. Oil prices at $50 per barrel could revive shale-drilling activity and stabilize declining US oil production, possibly already harbingered by the recent uptick in rig counts. Souring sentiment may reflect pre-positioning ahead of this week’s potent news-flow – notably, the FOMC rate decision – with traders using a lull in high-profile event risk to book profits and move toward a more neutral posture. In MCX, short term support for Crude Oil Jun Future comes at Rs 3,200.
Breaking that, Crude oil may tumble to Rs 3,100-3,030. Crude has made double top at Rs 3,442 and Rs 3,439 respectively on 30th May and 9th June. Usually, the double top is a signal that Crude oil may have peaked at the moment and some correction is expected. Also if we look at the oscillator, the RSI(14) has given negative divergence when double top was made also indicating reversal from current trend. Rs 2,800 seems to be the ideal support from where Crude oil may recover but at this point, it would be risky to be in long position.
Traders should wait for buying as the correction seems just to have started. There’s been a spectacular run, no question about it, but we think we’re at a point here where it’s going to be hard to continue. A lot of headwinds, Crude oil may face in the near future.”
The author is director, Tradebulls