By Bhavik Patel
Crude oil market has woken to the fact that there will be supply tightness in the second half of the year and demand destruction from recession fears have completely been proven wrong. This has propelled the recent rally in crude where it has jumped from $67 to $85 in the matter of one month. According to OPEC, potential fuel production outages during the upcoming U.S. hurricane season could tighten the Atlantic Basin market in the coming weeks. World crude oil inventory which was trading above 5 year average will be lower as OPEC+ have started cutting their production while upcoming US hurricane season will lower production of US Shale.
We might see some correction in crude oil prices as next month’s contracts are trading lower which is a sign of some profit booking and lower strong outlook for next month. Price in MCX is in an overbought zone so we would refrain from taking long positions but can recommend taking short positions via options which is a safer bet. In order for prices to scale $85 in WTI and $7000 in MCX, one correction is needed as the bull side is getting overcrowded. Some shake off is needed where weaker hands might leave and then we can see once again resumption of rally.
Don’t expect corrections to be steeper but after correction, we might see some consolidation. Rs 6500/bbl is the next support zone where we expect price may see taking support. In case correction does not come, then expect the ongoing rally to continue till Rs 7200/bbl. But we would like to take some profit off the table and go short via PE option with stoploss of Rs 7200/bbl in MCX and expected target of Rs 6700-6600/bbl on the downside.
(Bhavik Patelis a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult yourfinancialadvisor before investing.)