Crude oil prices rally amid global factors; speculator shorts signal potential correction ahead

Crude oil prices rally amid global factors; speculator shorts signal potential correction ahead

By Bhavik Patel

Oil price is bound to see weekly gain this week after two weeks of losing streak. Some of the reasons for the rally in crude oil price this week was the stimulus from China, the US inventory draw of 17 million barrel indicating strong demand from the US and anticipation of the extension of voluntary cut from Saudi Arabia and Russia. This week tropical Storm Idalia was barreling toward Florida’s Gulf Coast and some worried it could hit the eastern side of US Gulf Coast crude production. All in all, it was a strong week for oil bulls. Even China’s latest PMI reading did not pressure prices, possibly because while the overall figure was in the contraction zone below 50, several important sub-readings were above 50, indicating growth.

Meanwhile, India’s crude oil imports from sanctioned Russia fell in August to a seven-month low. Partly this was due to routine refinery maintenance but also due to decreased discounts on Russian grades. Discounts on Russian oil for October loading are now less than $5 per barrel. India’s imports from Saudi Arabia meanwhile rose to a multi-year high. In a market where everyone was looking at Chinese demand weakness, supply-side tightness became the key talking point thanks to Saudi Arabia’s production cut extending for the third straight month.

OPEC oil output rose in August as Iranian supply rose to its highest since 2018, despite ongoing cuts by Saudi Arabia and other members of the wider OPEC+ alliance to support the market. The Organization of the Petroleum Exporting Countries has pumped 27.56 mbpd in August up 2,20,000 bpd from July. That’s the first rise since February.

We believe there will be correction in prices despite favourable economic environment for crude and that is because speculators or hedge fund managers have started building up shorts. This week many of them have profited from their long positions and have started building short positions. So we expect some resistance to be faced at higher levels in crude oil prices.

In MCX, immediate resistance for Crude is at 7,050 – 7,100 and while the momentum oscillator is far from being overbought as RSI_14 is hovering around 65, the recent price action suggests that prices might correct before taking out the immediate resistance of 7,100. The 200-day moving average which was proving to be strong resistance for the most part of this year has now been prime support for the market.

The recent correction stopped at 200-day moving average and now prices have again reversed on the upside. Looking at 5 consecutive green candles on the daily chart, we expect some profit booking to occur and that is where buying opportunity will arise. So buy on dips Crude oil Sept Fut around 6,700 for an expected target of 7,000 and stop loss of 6,500.

(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.)