Market Strategy

Long-term uptrend intact in MCX crude future

Gurumurthy K. | Updated on December 07, 2013 Published on December 07, 2013




World’s top traded benchmark crude oil contracts, the West Texas Intermediate (WTI) and the Brent Crude are showing a divergence in the last few weeks. The spread between the two have widened to as high as $19 in November from almost a zero spread in July.

The WTI crude, the US benchmark for crude, has dropped 17 per cent from the August high of $112.2 on increasing inventories in the US. But however, the price has recovered about 7 per cent in the last week on reducing inventories.

Brent crude, on the other hand declined only 12 per cent due to the unrest in West Asia, which has limited the downside. There has also been a 7 per cent recovery from its low of $103 in the last few weeks.

Since Indian crude prices are linked to the Brent crude prices, the relief from falling prices can be limited.



Crude oil prices dipped immediately after Iran struck a deal to get temporary relief in its sanctions. But the actual impact of this deal on the market would be negligible in the short-term.

SUPPLY DEMAND

The ‘Fact Sheet’ released by the US government on the Iran deal states that Iran’s oil sales cannot increase in the next six months and will remain limited to 1 million barrels a day. This is far below the output of 2.5 million barrels a day prior to the imposition of the sanctions.

The US Energy Information Administration (EIA) in its Short-Term Energy Outlook released in November expects the consumption in 2013 to increase by 1.2 per cent to 90.25 million barrels a day. For 2014, EIA forecasts the consumption to increase by 1.3 per cent to 91.39 million barrels a day while the supply forecast at 91.54 million barrels a day is to exceed the consumption by 0.15 million barrels a day.

Long-term view: The MCX crude oil contract is in a strong uptrend since 2009. This long-term uptrend remains intact with strong support at Rs 5,300. The current sharp fall since October could halt at this support level. A fresh leg of up move from here will have the potential to take the contract as high as Rs 8,000 in the long term. A strong decline below Rs 5,300 is required to reverse the long-term uptrend. The targets on a reversal below Rs 5,300 will be Rs 4,700 and Rs 4,500.

Medium-term view: The medium-term trend is down. The MCX crude oil contract has tumbled about 25 per cent from its August peak of Rs 7,784. The downtrend will remain intact as long as the contract trades below the key resistance at Rs 6,500.The medium-term target on the downside is Rs 5,400. The downtrend will get reversed only on a strong breach above Rs 6,500. The target thereafter would be Rs 7,000.

Short-term view: The MCX crude oil contract is consolidating sideways between Rs 5,750 and Rs 6,100 over the last few weeks.

A breakout of this range will decide the short-term trend. Breach above Rs 6,100 will take the contract higher to Rs 6,200 immediately and to Rs 6,400 thereafter. On the other hand, decline below Rs 5,750 will take the contract lower to Rs 5,500.

>gurumurthy.k@thehindu.co.in

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