By Bhavik Patel
Oil prices got off to a weak start to the year as the IMF forecasted a third of world’s economies could sink into recession this year. The fall in crude oil prices can also be attributed to profit booking after crude rallied from 6000 to 6700 one way. The IMF spoke of slowing economies in the United States, Europe, and China, compounded by China raising its export quotas for refined fuel which is a sign that the world’s largest oil importer could be expecting weak domestic demand.
The increase in Covid cases is also a concern for crude bulls as with rising cases, travel growth would also come to halt. We already had seen travel disruption during the heavy season of traveling during Christmas due to a snowstorm and now with the world’s biggest migration coming in the form of Chinese New Year, rising cases of Covid could curtail that. US manufacturing data for the month of December show US economy shrinking. Regarding the overall economy, the figure indicates contraction after 30 straight months of expansion.
Another reason for correction in prices was reports published from OPEC that oil production was higher in December. A rebound in Nigerian production raised OPEC’s oil output in December by 120,000 barrels per day (bpd) compared to November, according to a monthly Reuters survey published on Wednesday. However despite the increase in oil production last month, OPEC was still pumping well below the collective target of the ten members bound by the OPEC+ pact. Combined output of OPEC was at 7,80,000 bpd which is below their quota for December. US Crude oil inventories rose by 3.298 million barrels, American Petroleum Institute (API) data showed on Wednesday, after a million bpd in U.S. refining capacity was taken offline last week. The SPR (Strategic Petroleum Reserve) now contains the least amount of crude oil since early December 1983.
Moscow has also warned it could cut production by up to 700,000 bpd as it responds to the $60/barrel price cap on its oil implemented by the G7 in December. According to Energy Intelligence, Russian refineries are already struggling with a labor shortage due to conscription for Putin’s war on Ukraine. So we might see a fall in crude oil prices due to recession fears but once again we would reiterate that the era for cheap oil is over and we will not see levels sustain below $60 in the future.
In MCX, momentum oscillator RSI_14 shows there is still room on the downside as RSI_14 is at 40. Historically we have seen crude bouncing from the levels of 34-30 so we would advise traders not to rush in and buy at current levels as one could get opportunity at lower levels. Price is failing to sustain above the 20 and 50-day moving average which clearly shows the trend is weak. Next week we may see levels till 5850 where investors can take a long position with a stop loss of 5700 and expected target of 6250.
(Bhavik Patel, Currency and Commodity Analyst, Tradebull Securities. Views are author’s own.)