Rising Covid cases, higher supply may continue to weigh on oil

NYMEX crude oil rose in four out of five trading sessions last week, rallying sharply supported by a bigger-than-expected decline in US oil stocks. It registered a weekly gain of 6.4 per cent. The prices were also supported by the International Energy Agency and the Organization of the Petroleum Exporting Countries' upward revision of global demand growth forecast for 2021 on the back of US and Chinese economic optimism.

Crude had been trading in a broad range of $58-62/bbl for the past few sessions and a breakout led to some extended gains during the week.

Moreover, increased tensions between Saudi and Yemen provided the bulls the required trigger. Tensions between the US and Iran rose also as Tehran vowed to boost its nuclear capacity following an attack on its plant.

Crude oil rose also as the US dollar index slumped to a nearly one-month low while the US Dow Jones Industrial Average index rallied to a fresh record high.

However, weighing on crude oil is the rising virus cases, which have forced countries to take stricter steps including travel restrictions. Also weighing on the price is the prospect of higher supply in the coming months. OPEC and allies have committed towards gradually increasing supply in the coming months.

The US EIA drilling activity report also projected a marginal rise in US crude production from shale resources in May. A rise in US crude oil rig count to April 2020 highs also reflects an improving production outlook.

Crude oil has bounced back sharply from recent lows and while the momentum looks positive given optimism about the US economy, we do not expect a sustained rise.

Rising virus cases and the prospect of higher supply in the coming months will continue to weigh on the prices.

We may soon see market players positioning for the next meeting of OPEC and allies on April 28, where the group may reaffirm its production policy for the next three months.

On the technical front, MCX crude oil finally broke out of the consolidation range and has reached the trend line resistance. Crude has been trading with a sideways to negative bias since it broke the rising trend line. However, the pullback mid-last week has supported the bulls.

Although the prices pulled back in the previous week, the average directional index (ADX) is still not showing strength in the rally, as it is still below 25.

Moreover, the price has tested the trend line support turned resistance and has stayed at those levels for the last two trading sessions. Is this a reversal rally or a retracement of the bearish trend? This will be known only on a break of Rs 4,840 or Rs 4,540 range (MCX crude May futures).

So going by the trend, the price might once again start the corrective mode provided the Rs 4,840 holds. A break below Rs 4,540 will confirm the continuation of the corrective move. (Mentioned levels are for )

(Ravindra Rao, CMT, EPAT, is VP- Head of Commodity Research at Kotak Securities. Views are his own)