Crude oil prices correcting on recession fears; wait for bottom around Rs 5600/bbl before taking fresh positions

Crude oil prices are correcting on recession-based fears. The recent rally of about 6-85 was expected based on past trends, but crude oil prices are unable to sustain the upside momentum.

crude oil
Investors should wait for MCX crude prices to make any bottom around 5,600 before taking any fresh positions.

By Bhavik Patel

Crude oil has lost momentum on the upside and now is correcting on recession fears. Last week the rally in crude to the tune of 6 to 8% was on expected lines as historically whenever crude has come near an oversold region, we have seen a rally of at least 6 to 8%. Now again crude is finding it difficult to continue the upside momentum due to lack of fresh positive triggers. 

For the third month running, OPEC has barely changed its forecast of global oil demand, predicting growth of 2.33 million barrels per day, or 2.3% YoY growth, good for a very slight increase from its previous forecast of 2.32 million barrels per day. Other agencies like Standard Charter or IEA see growth but very tepid growth and not to the magnitude of what OPEC is forecasting. 

The cut from OPEC is being overshadowed by growth slowdown fears. Russia which was supposed to cut output by 5,00,000 bpd is being questioned by other OPEC members as according to Bloomberg, tanker-tracking data showed that Russia’s crude oil exports by sea hit a new high of 3.55 million bpd in the four weeks to May 5, the highest shipments since at least early 2022.

The downside yesterday was further enhanced by weak US jobs data where unemployment came 9 months high. According to the latest Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), tighter market conditions prevail in the US. Not just in the US but also in China as new Chinese bank loans tumbled far more sharply than expected in April, adding to worries that the economy’s post-pandemic recovery is losing steam. On the supply front, Iraq has sent an official request to Turkey to restart oil exports through a pipeline running from the semi-autonomous Kurdistan Region in northern Iraq to the Turkish port of Ceyhan, which could add 450,000 bpd to global crude flows. Starting this route would add additional woes on crude oil prices.

In MCX, crude oil prices are expected to re-test its lows of 5,560. At the moment, all indicators and oscillators point to weak trends and any short covering will likely be shallow. 6,000-6,100 is the immediate hurdle, crude needs to clear while on the downside, support emerges around 5,650-5,560. Downside seems limited as again near the support zone, we would see crude coming in the oversold region so we would advise investors to wait for crude to make any bottom around 5,600 before taking any fresh positions.

(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)

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First published on: 14-05-2023 at 09:34 IST