Support for MCX Crude at Rs 4205: Kotak Commodity

Kotak Commodity has come out with its weekly report on Crude Oil, Natural Gas. As per research firm support for MCX Crude Sept contract is seen at Rs 4205 while Resistance is seen at Rs 4340.

Market Analysis
NYMEX crude rose as high as $90.25/bbl earlier today but failed to hold on to the gains and slipped more than $1 to trade near $89/bbl. Crude oil came under pressure today after a sharp 2.3% rally yesterday which marked its second consecutive gain. Crude oil rose sharply in last two days as US dollar shed some of its recent gains and as US equity markets managed to note some gains. The gains were further exacerbated by spread trade and expectations that weekly inventory report may note a drop in US crude oil stocks. Crude oil retreated today as US dollar gained against the Euro amid continuing Euro-zone debt concerns. Meanwhile, Asian equity markets are trading mixed today.

Crude oil was also affected by spread trade. While WTI crude gained more than 2% yesterday, Brent crude ended lower for a second day narrowing the difference between the two. The premium of ICE Brent crude Oct contract over NYMEX WTI crude narrowed to $21.68/bbl yesterday as against $24.06/bbl a day earlier. At current price, the spread stands at $22.26/bbl.

The spread between the two has narrowed sharply ahead of expiration of Brent crude contract and expectations that US weekly inventory report may note another drop in US crude oil stocks. Expectations that Libyan oil supplies may resume soon is also weighing on Brent crude prices. The International Energy Agency believes that Libyan will restore output to about 300,000 bpd in the fourth quarter, from zero last month. OPEC forecast that Libya can reach 1 mn bpd within six months and full capacity within 18 months.

API weekly inventory report noted a bigger than expected decline in US crude oil stocks for the second consecutive week. US crude oil stocks plunged 5.052 mn bbl as against expectations of a 3.1 mn bbl decline. The report however noted a 2.758 mn bbl increase in US gasoline stocks as against expectations of a 0.5 mn bbl decline.

Apart from spread trade between Brent and WTI, WTI crude is also gaining support from spread trade between crude and product futures. Crude oil gained more than 2% yesterday while gasoline ended with marginal gains while distillate futures ended lower. The 3-2-1 crack spread narrowed to $27.68/bbl as against $29.74/bbl a day earlier. The spread has widened to $39.59/bbl in recent days.

Crude oil shed some of the gains as Euro remains under pressure against the US dollar. Strength in US dollar makes dollar denominated commodities expensive for traders using other currencies. The Euro trades weaker against the US dollar today after a minor gain yesterday however the common currency is still above the low of 1.3499 set earlier this week which was the lowest level seen since Feb.

Euro recovered from recent lows as market sentiments were bolstered by reports that China may purchase Italian bonds. As per a Financial Times report, Italy has asked China to make significant purchases of Italian debt. China has previously indicated buying interest for Spanish and Greek bonds when these economies came under pressure. However speculation about China bailout eased after Italian officials told news services they hadn't had such talks. Meanwhile, Chinese premier was quoted saying that economies must put their own houses in order and not rely on bailouts from China.

Also weighing on the common currency are concerns about health of Greece and Italy. Concerns about Greece are high after a number of nations asked for collateral for their share of loans and as talks of another trance of EU-IMF loan were delayed amid concerns that Greece won't meet its fiscal targets. Meanwhile a German official was quoted saying that that an orderly default for Greece could no longer be ruled out. German Chancellor, French President and Greece Prime Minister will hold a conference call to discuss measures however no major outcome is likely. Meanwhile, French banks are under pressure amid concerns that Moody's Investors Service could downgrade them this week due to their holdings of Greek government debt. Concerns
about Italy rose further yesterday after disappointing bond sale.

Apart from Euro-zone economies, concerns are high about US economy as well. Mixed US economic data, lack of clarity about additional measures by Fed and increasing political uncertainty has kept concerns high about the economy. Federal Reserve Chairman Ben Bernanke last week said that the US central bank would spare no effort to boost disappointingly weak growth and reduce unemployment. He however offered no details of steps the Fed might take. Focus is now on Fed's Sept. 20-21 meet and expectations are high that they will announce additional monetary support for the economy. However Fed officials are not unanimous over this move and the central banks is likely to consider alternative solution than the bond purchase program announced last year.

Overall, crude oil has retreated from recent high weighed down by strength in US dollar and choppiness in equity markets. Also weighing on prices are demand concerns amid weakening outlook for US and Euro-zone economies. Trend in equity markets will continue to be the key price determining factor for crude oil. Equity markets are likely to remain choppy but we may not see a sharp decline similar to the drop seen in early Aug.

Outlook
Crude Oil- MCX Crude may note some decline tracking cues from international exchange. NYMEX crude has slipped more than a $1 today after the sharp rally in last two trading sessions. Weighing on prices is strength in US dollar against the Euro amid continuing Euro-zone concerns. Also weighing on prices is choppiness in equity markets. Crude gained support from API report which noted a bigger than expected decline in US crude oil stocks. The report however also noted an unexpected increase in gasoline stocks. Trend in equity and currency markets will continue to be the key price determining factor for crude oil. Focus today will be in Eurozone
industrial production and US retail sales data. Weaker data could put further pressure on crude oil prices. Support for MCX Crude Sept contract is seen at Rs.4205 while Resistance is seen at Rs 4340.

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