The concerns over US-China trade war will bring down the crude oil following weakness in global growth
Pritam Kumar Patnaik
The crude oil prices ended the week on a weaker note, as the fall that triggered because of a larger than expected inventory, intensified after the US imposed 25 percent tariff on $200 billion worth of Chinese goods.
The US President went on to say that he would sharply hike tariffs on Chinese goods, leading to reciprocal action by the Chinese government and potentially derailing months of trade negotiations between the world's two largest economies, which would lead to stoking concerns over global growth.
Within the oil industry, there are signs of a further rise in output from the United States. The EIA forecasts 2019 US crude production to rise to 12.45 million barrels a day, up 0.5 percent from the April forecast.
This has made the United States the world's biggest producer, ahead of Russia and Saudi Arabia. On the supply side, the United States tightening sanctions on Iranian oil exports have already reduced Iranian crude exports by 50 percent over the past year, to less than 1 million barrels per day (bpd), with shipments to customers expected to drop further to as low as 500,000 bpd in May.
Meanwhile, hedge funds and other money managers have also cut their bullish wagers on the US crude oil. The speculator group cut its position by 18,689 contracts to 3,08,130 during the week ending 30 April 2019.
Looking ahead, prices could remain rangebound in the short run. Demand from China remained robust after data showed that crude oil imports in April rose to a record of 10.64 million barrels per day (bpd), an increase of 11% over last year.
However, investors will remain cautious after the US-China trade talks ended with no deal between the two countries. President Trump’s administration has given one months’ time to the Chinese government to seal the deal or face further tariffs.
Thus, an existing supply squeeze due to embargoes on Iran and Venezuelan oil, which has led to heavy premiums in the spot market and a potential economic turmoil anticipated due to escalations in tariff talks between US and China, will lead to increased price volatility, till such time that proper resolution arrives on the trade talks.
The concerns over US-China trade war will bring down the crude oil following weakness in global growth.
The Brent July 2019 contract on ICE could remain within the range from $67-73/barrel in the week, while the NYMEX June 2019 contract could remain in a range of $59-64/barrel.
Technically, Crude Oil May 2019 contract, on the weekly chart, has formed spinning top candlestick which is a sign of bearish reversal. Crude oil price is taking support at its 200-day daily moving average (DMA) which is placed at Rs 4,302.
If it sustains above this level, then a bounce-back could be expected to Rs 4,470. Alternatively, if the crude oil prices break below Rs 4,300 then the prices can fall up to Rs 4,250 to Rs 4,100.
The daily momentum Indicators MACD & RSI remain bearish, which suggests a negative breath in the counter.
For the week, the strategy for crude May 2019 contract for the week is to sell on the rise in the range of Rs 4,350 to Rs 4,360 with a stop loss of Rs 4,460 and a target price of Rs 4,100.
The author is Head Commodities, Reliance Commodities.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.