By Bhavik Patel
Crude prices witnessed sharp fall this week and all the gains it amassed around 1st April when OPEC+ has unexpectedly decided to cut production has been wiped out. In fact prices are trading lower than that level and now we believe there will be some pullback. There is disconnect between crude prices and oil inventories. Normally with rising US inventories, prices fall while falling inventories push prices higher. However, large inventory draws over the past couple of weeks have failed to prevent significant price falls. Crude oil inventories have fallen below the five-year average for the first time this year and yet prices are in free fall.
Another reason for falling crude oil prices is weak economic data from China. China’s factory activity dipped in April, according to the private Caixin purchasing manager’s index. Also the US banking crisis is not helping sentiment in crude as any financial crisis affects crude prices. Further, there are reports that Russian crude shipments remain strong despite sanctions and embargoes. Reuters reported April oil loadings from Russia’s western ports are on track to reach their highest since 2019 at more than 2.4M bbl/day. So in a scenario where demand is expected to be weak and supply is still forthcoming, prices are predictably in a downward trend.
However, all is not lost for crude. On the flip side, the Fed gave signals that it may now take a break from rate hikes, which should have a positive effect on prices. Also the prices have corrected sharply and OPEC+ will not let price drift down further as they have to balance their budget and the sweet spot for them is around $80/barrel. So despite strong negative news, we will see crude bouncing from current levels.
In MCX, Crude oil future is near to its oversold zone as RSI_14 is at 32. Historically we have seen prices bouncing at least 6 to 8% whenever prices have come near the oversold zone. This time also we expect the same to happen and it is a good opportunity for traders to go long with a short term perspective. Risk/reward ratio favors the long side and so we recommend traders to go long at current market levels with stoploss of 5400 and expected target of 6100 and more
(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)