By Bhavik Patel
Oil prices are trying to recover after a sharp fall on Wednesday. After three days of significant loss, price is near the oversold region. The fall was initiated after two bank collapses in the US last week which ignited fears of industry meltdown. To make matters worse, the collapse in US banks was spilled over to Swiss Bank Credit Suisse which saw its price trade at all-time low with high chance of default but bail out came from Swiss Central Bank which has lent $54 billion.
There was panic selling in crude and counter weight of demand increase from China was ignored. OPEC and IEA also started to calm the market stating that they expected global oil demand to hit a record high this year, at 102 million barrels daily. OPEC, for its part, said oil demand this year will rise by 2.32 million barrels daily with China accounting for a large portion of it. However, OPEC did caution that rapid rises in interest rates and global debt levels could cause significant negative spill-over effects, and may negatively impact the global growth dynamic. In the very near term, oil prices will follow headline news and may witness more selling pressure if cracks widens in the financial system.
In the medium term, we believe oil prices will not stay below $70 for the long term. OPEC is once again the most influential player in global oil supply. US shale is growing slowly as capital discipline, returns to shareholders, supply-chain bottlenecks, cost inflation, and lower well production combine to hold back production increases. OPEC had already warned that underinvestment will lead to supply crunch as market participants are expecting demand-supply mismatch in the second half of the year where demand may outstrip supply. The only wild card would be financial stability. If we have another banking crisis, then the price of crude may continue to fall; otherwise in the second half, we may see the price again going back towards $90-100.
In MCX, crude has just bounced from the oversold region where RSI_14 is at 32 after briefly touching 25. We would recommend not to take any fresh short position as risk/reward does not justify taking any fresh short position from the current juncture. Instead, we would recommend to wait for some pullback around 5700 for a fresh short position with expected target of 5500 and stoploss of 5800 closing basis.
(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.)