Crude price set to rally

Decisive breach of the key technical resistance at $105 per barrel will keep the price higher

The suddent 3.7 per cent surge in price last week following the civil war in Iraq has put crude oil back in the news. The commodity started 2014 with a strong rise in prices. The crude oil futures contract traded on the New York Mercantile Exchange (NYMEX) surged 15 per cent between January and March. Since then, however, the price of the commodity has remained stable, broadly in the range of $97 and $105 per barrel. But the threat of a supply disruption following the recent violence in Iraq and the possibility of US military action against Iraq has triggered a break out above $105 and has pushed the price higher last week.

On the domestic front, the crude oil futures contract traded on the Multi Commodity Exchange (MCX), which moves in tandem with the NYMEX crude, was range-bound. Since March, the contract had traded between ₹5,930 and ₹6,350 per barrel, after rising sharply by about 16 per cent in the first two months, this year. The threat and uncertainty prevailing in the global market has triggered a sharp rise breaking above ₹6,350 last week.

Imbalance

The US Energy Information Administration (EIA) expects US crude oil production to rise 13.5 per cent in 2014 to an average 8.4 million barrels per day (bpd) from an average 7.4 million bpd produced in 2013. Also, the production in 2015 is estimated to rise by about 11 per cent (from 2014 estimates) to an average 9.3 million bpd. This forecast for 2015 is the highest since 1972.

The Organisation of Petroleum Exporting Countries (OPEC) projects the demand for global crude oil to go up slightly by 1 per cent to 91.1 million bpd in 2014 from 90 million bpd in 2013. A strong increase in oil production could lead to a surplus, thus limiting rise in crude price. Also, once the tapering of bond purchases is done within the US and interest rates start to rise, a stronger dollar could push crude oil price lower. But given the geo-political tensions in Libya, Syria and Iraq, the probability for a price fall anytime in the near term is unlikely.

Outlook

Long-term view: The outlook for the MCX-crude oil futures contract is bullish. It has been trading in a strong bull channel since 2009. The contract is now poised near the channel support. The 21-month moving average at ₹5,785 per barrel and the channel support near ₹5,760 are key long-term supports for the contract that can limit the downside. An intermediate fall to test ₹5,760 levels cannot be ruled out.

But an immediate breach of this level looks less probable. A reversal from ₹5,760 can take the contract to as high as ₹8,000 per barrel in the long term.

On the other hand, if the contract declines below ₹5,760, it can then target ₹5,200. But such a fall looks less probable as of now.

On the global front, the NYMEX crude oil futures contract has breached its crucial resistance level of $105 per barrel. This has opened doors for an immediate rally to $111 and $113.

A further break above $113 can take the crude oil price higher to $115.

Medium-term view: The MCX-crude oil futures contract has been consolidating sideways between ₹5,640 and ₹6,550. It is currently nearing the upper end of this range.

A breakout on either side will decide the ensuing trend. Declines below ₹5,640 can drag the contract lower to ₹5,500 and ₹5,300. On the other hand, a bullish breakout above ₹6,550 can target ₹6,700 and then ₹7,000 in the medium term.

Short-term view: The sharp 5.7 per cent rally last week has turned the short-term outlook bullish. The contract has risen decisively above its 200-day moving average, currently at ₹6,153.

Immediate support for the contract is at ₹6,350 and then the 200-day moving average will be a key short-term support. While the contract trades above these support levels, a rally to ₹6,550 is likely in the short-term.

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