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Oil prices on the mend after sharp fall; wait for price to recover before commencing long position

Bulls are hoping that OPEC+ group which meets on Sunday makes some changes to its production plans for January. OPEC+ agreed to drastically cut its production quotas by 2 million bpd last month, which first went into effect in November.

Oil prices on the mend after sharp fall; wait for price to recover before commencing long position
Trend for crude Dec contract still is negative as on daily scale in MCX, it is making lower top and lower bottom formation. Image: PTI

By Bhavik Patel

Oil price, which was relentlessly falling, saw some life back as short covering came since price was in oversold zone. Price were in downward frenzy after expectation of demand destruction from recession fears and lockdown in China due to rising Covid cases. Oil prices have been on the mend after a sharp drop at the start of this week amid Chinese protests against Covid restrictions.

Rally, yesterday in crude was also in part because of huge inventory draw from US. At 419.1 million barrels, oil inventories are 8 percent below the five-year average for this time of the year. Many investment banks have released forecast for oil to be higher from current levels at the end of the year.

Bulls are hoping that OPEC+ group which meets on Sunday makes some changes to its production plans for January. OPEC+ agreed to drastically cut its production quotas by 2 million bpd last month, which first went into effect in November. The actual cut delivered by the group, however, was expected to be much more modest, somewhere around 1 million bpd, because several OPEC+ members were already producing under the new quota before it even hit. However, we expect OPEC+ to continue with the current production and keeping it unchanged as clearer picture will emerge regarding price cap on Russia’s sea borne oil.

Also read: Is this the end of the monetary policy tightening cycle?

EU is tentatively agreeing to set the price cap on Russian crude at $60 per barrel. The deal must first be agreed to by Poland, who had pushed for capping Russian crude oil prices at the lowest level possible, then by all EU governments by writing by the Friday deadline. Previously, the report was that EU was considering price cap around $65-70 and that saw price jump as Russia is already selling crude below this price so there wont be any supply shortage.

Trend for crude Dec contract still is negative as on daily scale in MCX, it is making lower top and lower bottom formation. It had breached its previous swing low of 6292 and made low of 6052 but as it was in oversold region, some short covering was expected which is being played out. Prices still is under 20, 50 and 200-day moving average.

Last week we did recommend to cover any short position and wait for any reversal direction or bottom forming formation to emerge before taking any long position. Short term bottom seems to be in place around 6200 but trend is still bearish making us reluctant to recommend long position. We would recommend to wait for price to breach 7000 before commencing long position for expected target of 7250 and stoploss of 6900.

(Bhavik Patel is the commodity/currency analyst at Tradebulls Securities. The views expressed are author’s own.)

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First published on: 03-12-2022 at 08:16:04 am