The prices of crude oil rallied last week – Brent crude futures on the Intercontinental Exchange (ICE) gained 2 per cent and MCX crude oil futures (continuous contract) was up by one-third of a per cent as they ended at $93.5 and ₹7,043 per barrel respectively.
Charts show that the energy commodity is trying to form a higher base, which is good for the bulls. The main fundamental factors that are in favour of the bulls are the recent production cut by the OPEC and the European embargo on Russia which can lead to supply tightness. Apart from this, the crude oil inventories in the US saw a drop, as per the latest EIA (Energy Information Administration) data. Inventory depleted by 1.7 million barrels for the week ended October 14, compared to the expected increase of 1.3 million barrels.
Brent futures ($93.5)
The fall in prices in the first two weeks of this month have taken the ICE Brent futures back to the falling trendline which it invalidated in early October. That means, the contract is now testing this resistance-turned-support. The price action is hinting at the formation of a higher low on the daily chart and the price is now above both 20- and 50-day moving averages.
This gives it a positive inclination and there is a good chance for the contract to rally from here where it could appreciate towards the resistance band of $98-100. A breach of this can take the Brent futures up to $105 in the near term. However, if the price drops from here and goes below $89, we might see another leg of downtrend.
MCX-Crude oil (₹7,043)
There was a significant drop in trader interest last week as the cumulative Open Interest (OI) of crude oil futures on the MCX dropped. It declined to 3,926 contracts on Friday where it stood at 7,508 contracts a week ago and at 13,315 contracts on October 7.
However, considering last week’s price action, the OI movement did not lend us any direction. Nevertheless, the chart shows that MCX crude oil futures is now attempting to form a higher base and the support at ₹7,000 seem to be holding well as it had been protecting the contract against decline for a couple of weeks. Notably, both 20- and 50-day moving averages lie at ₹7,000.
Therefore, we expect the contract to rally from here gradually if not swiftly. But note that breaking out of ₹7,600 is a considerable resistance. Subsequent resistance is at ₹8,000.
On the downside, the contract has support at ₹7,000 and ₹6,800.
Trade strategy: One can consider initiating long positions at the current level of ₹7,043 with stop-loss at ₹6,725 at first. Revise the stop-loss up to ₹7,100 when the price rises beyond ₹7,325. Liquidate the longs at ₹7,600 since this is a considerable resistance against which there could be a fall in price.