Crude oil started on a firm note last week, continuing a trend witnessed in the previous week, but succumbed to profit taking followed by a sharp rebound on Friday.
A spate of negative factors pulled crude oil from March highs. These included the prospect of higher supply from Iran as world leaders intensified negotiations over reviving the nuclear deal, China’s emphasis on measures to curb rising raw material prices and a correction in the US equity market amid worries about monetary policy tightening by the Federal Reserve.
A temporary truce between Israel and Palestine also reduced the risk premium. Adding to it, the count of crude oil rigs in the US rose to a fresh April 2020 high whereas the US Energy Information Administration forecasted higher production from shale resources next month. Demand concerns amid rising corinavirus cases in India and other Asian countries also weighed on prices.
However, supporting the price was the EIA’s weekly inventory report, which showed a smaller-than-expected rise in US crude oil stocks and a bigger drop in gasoline and distillate stocks. Also supporting the price was the prospect of higher demand from the US and Europe, as an improvement in the Covid-related situation led to the easing of restrictions.
Crude oil along with larger commodities may witness volatile trade. China’s insecurity with higher raw material prices, increased discussions of tightening by the US central bank and the diverging coronavirus situation have dented market sentiment.
The general bias may be on the downside unless we see significant improvement in the coronavirus situation and the prospect of higher Iranian supply.
Technically, the price is making higher highs with higher lows, suggesting a broadening triangle formation. However, the price broke from the trend line and moved back again into the broadening triangle, indicating a possible bounceback. Flattened Bollinger Bands (BB) are also suggesting a sideways trend. Immediate resistance is expected at Rs 4,940 (upper BB) and support at Rs 4,515.
From the above, we expect the price to trade in the range of Rs 4,940-4,515 with a sideways bias. A breakout on either side will provide a directional view.
(Ravindra Rao, CMT, EPAT, is VP-Head Commodity Research at Kotak Securities)
