Commodity Analysis

West Asian unrest will keep crude bubbling

Gurumurthy K | Updated on February 10, 2014 Published on February 09, 2014

Weak rupee to keep the domestic price under pressure. Deal with Iran for import settlement in rupees could give some relief



Brent crude, the benchmark for Europe, Africa and West Asian countries, is under pressure due to the unrest in the West Asia-North Africa region.

The crisis in Syria, Libya and Egypt took oil price from a low of $96.75 in April 2013 to a high of $117.3 in August. The uncertainty in the region could keep the price well above the psychologically important level of $100 for some more time.

The Organization of Petroleum Exporting Countries (OPEC) expects world oil demand to increase marginally by 1.05 million barrels per day (mbpd) to 90.91 mbpd in 2014 from 89.86 mbpd in 2013. The slowdown in China, a major consumer of oil, could keep demand under check this year. Also, calls for reduction in pollution and increasing usage of alternatives, such as natural gas in China, will reduce demand.

Domestic impact

India largely depends on imports to meet its oil demand. Oil import is one of the major contributors to India’s current account deficit, next to gold. As such, any volatility in global oil prices will negatively affect import prices for the country. According to OPEC, India’s oil demand increased by 1.3 per cent to 36,75,000 barrels per day during January-November 2013. It expects demand to remain unchanged for 2014 due to the unresolved fiscal issues in the country. Fluctuation in the rupee against the dollar will also play a major role in determining domestic oil prices.

Fresh fears of another round of emerging market currency selloff is adding to the pressure on the Indian rupee now and there is a threat of the currency weakening again. This could keep domestic oil prices higher as imports become costlier.

However, the Indian Government has begun fresh talks with Iran to make settlement for crude imports in rupees. If they strike a deal, it would help ease the domestic price.

Outlook

Long-term view: The long-term trend for the MCX-Brent Crude Oil futures contract is up. Within this uptrend, the contract had consolidated sideways in the form of a triangle from early 2012.

A strong upside breakout of this triangle in July 2013 is keeping the long-term uptrend intact. Key support is at ₹5,900. Any intermediate pullback within the uptrend can be limited to this support level.

On the upside, the previous high of ₹7,999 recorded in August 2013 will be a crucial resistance level to watch. A strong breach of this resistance can take the contract to ₹9,000 in the long term. The outlook will turn bearish only on a strong decline below ₹5,900. The supports at ₹5,000 and ₹4,500 will be the targets if a fall below ₹6,000 is seen.

Medium-term view: The medium-term outlook is bullish. A fresh leg of upmove has begun from April 2013. It touched a high of ₹7,999 in August 2013 and is now witnessing a corrective pullback. The corrective fall is now nearing a key medium-term support level of ₹6,230. The probability of a reversal from this support level is high. Such a reversal can target the intermediate resistance of ₹7,400 initially. A breach of this resistance can take the contract back to ₹8,000 over the medium term. This view will get negated if the contract falls below ₹6,230. The target below ₹6,230 will be ₹6,000.

Short-term view: The MCX-Brent Crude Oil contract is trading in a sideways range between ₹6,500 and ₹7,100 since September 2013. A breakout on either side of ₹6,500-7,100 will decide the short-term trend.

A breach of ₹7,100 can target ₹7,350 on the upside. On the other hand, a fall below ₹6,500 will target ₹6,330 in the short term.

However, the bias is to see a bullish break above ₹7,100. The contract is getting support from the 200-day moving average, which is currently at ₹6,560.

The price action in the line chart coupled with the bounce from the 200-day moving average support last week leaves a high probability for the contract to break ₹7,100 and target ₹7,350 in the short term.

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