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Crude Check: Short build-up on MCX-Crude oil

Crude Check: Short build-up on MCX-Crude oil
Crude Check: Short build-up on MCX-Crude oil

Crude oil prices slumped last week on reports of China, the largest importer, reducing its purchases for December as they continue their struggle with Covid. The Brent crude futures on the Intercontinental Exchange (ICE) tumbled 8.3 per cent, the biggest weekly loss since the first week of August this year, as it closed at $87.9 a barrel. Likewise, the MCX crude oil futures (continuous contract) fell 8.2 per cent by wrapping up the week at ₹6,503 per barrel.

The fall was despite the latest EIA (Energy Information Administration) data showing a drop in inventory in the US. As per their report, the crude oil stock reduced by 5.4 million barrels versus the expected drop of 1.2 million barrels for the week ended November 11.

Therefore, the reduced demand from China and the European refiners stacking up oil more than expected had weighed on the prices of the energy commodity. Certain reports show that Europe, which supposedly had to take the biggest impact with respect to crude supply because of the Ukraine war, more than doubled their imports from Latin America as they bought over 0.3 million barrels per day (bpd) so far this year. On an average, they had imported 1.1 million bpd from the US, potentially keeping the continent in surplus.

So, overall, the issue of supply tightness does not look like one at this juncture.

Brent futures ($87.9)

The Brent futures fell off the resistance band of ₹98-100 last week. It declined below the support at $90 and ended the week at $87.9. Although the price action appears bearish, the contract has a support at $85. If this is broken, the downswing can accelerate where the price can fall to $76, a support. Subsequent support is at $65.

MCX-Crude oil (₹6,503)

While we had expected the price to move up, the December futures of crude oil on the MCX fell sharply last week and it penetrated through the support at ₹6,750 to invalidate it. The breakout occurred with significant volume. Derivatives data, especially that of the futures, show considerable short build-up. That is, as the price declined to ₹6,503 from ₹7,083 over the past week, the cumulative Open Interest (OI) of crude futures on the MCX shot up to 16,028 contracts from 7,343 contracts. This indicates short build-up.

However, note that there is a support at ₹6,300 which can help arrest the fall. Yet, a breach of this can intensify the fall where the contract could see a quick drop to ₹6,000. The downside might even extend to ₹5,500. On the other hand, if there is a rally form here, ₹6,750 and ₹7,000 will be key hurdles.

Trade strategy: Since the MCX crude oil futures has an important support at ₹6,300, we suggest not to go short at the current price. One can consider fresh shorts if the price slips below ₹6,300. Place initial stop-loss at ₹6,520. When price slips below ₹6,000, tighten the stop-loss to ₹6,200. On a dip to ₹5,750, book half of your shorts and modify the stop-loss to ₹5,950. Exit the remaining at ₹5,600.

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