Trading position (short-term; my opinion; levels for crude oil’s continuous futures contract): Hold long positions with entry at $59-61 with $51.50 as a stop-loss and $68.10 as the initial price target. There is a decreased probability of big dips for the next few weeks, hence keeping the stop-loss much farther behind is justified.
We have been closely observing the increased supply of oil from Iran to China in the past few weeks. Now, there is an official 25-year bilateral agreement between the two countries which involves China investing in Iran’s energy sector in exchange for greater access to Iran’s oil. Since both countries are currently facing U.S. sanctions, this agreement will assure long term oil supply and will be long-term bearish in nature – meaning that prices are likely to fall.
India is also scouting the market for sources offering oil with cheaper and favorable terms. This trend is hinting towards a diversification of suppliers, with increasing share of supply from the U.S. and gradual reduction of reliance on OPEC+ suppliers. Since India is the second largest market for Saudi Arabia, there will be efforts to retain this position by possibly boosting production in coming months. This is again a long-term bearish trend for the market in response to the higher oil prices.
There is news of another drone attack on Riyadh oil facilities, although no damage has been reported. Further attacks from Iran-backed Houthi rebels across the southern border in Yemen are probable in the coming weeks which can potentially put the oil supply at risk.
Efforts are ongoing to unblock the Suez Canal and there is news of a partial refloating of the container ship, Ever Given. However, we are still far away from a complete dislodging of the ship, and oil tankers have already started taking the longer route via the south of Africa. What does this mean for oil? There is a high probability of a rise in prices in the short term because of the increase in total shipping costs.
Subdued demand is a strong bearish factor holding the prices at current level. There is certainly an increase in Covid-19 cases across Europe, India and the U.S. I expect that instead of severe lockdowns, a strategy of increased vaccination will be followed, hence demand will not be greatly subdued.
The U.S. dollar has strengthened in the past two weeks, as seen in the graph below. For the coming weeks, I expect stability or a slight weakening of the dollar leading to an upward pressure on oil.
If we look at the chart below for crude oil prices, we see very strong bullish signs for the early part of this week. The last four trading sessions witnessed that the lowest price for each day was getting higher the following day.
To summarize, there are strong short-term bullish factors mainly driven by the ship blockage in the Suez Canal and expected weakening of the U.S. dollar. There seems to be a support at the $58-60 levels and our long position holds well.
As always, we’ll keep you, our subscribers well informed.
Trading position (short-term; my opinion; levels for crude oil’s continuous futures contract): Hold long positions with entry at $59-61 with $51.50 as a stop-loss and $68.10 as the initial price target. There is a decreased probability of big dips for the next few weeks, hence keeping the stop-loss much farther behind is justified.
Thank you.
Nishant Jain, MBA, CPSM
Oil Trading Strategist
