Oil price is confined in the range of 5800-6200 but there is volatility also in the narrow range. Price is reacting at every geopolitical event in the Middle East especially in the Red Sea.
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We have seen crude declining on back of higher than expected US inventory and decline in demand but on the opposing force, Houthis attack on ships in Red Sea have given the tailwinds it needs to keep price afloat.
Recent attacks on Yemen by US and UK forces will also increase the conflict as Houthis will also retaliate to the attack. These events will give any correction in crude price an opportunity to take long positions. Hedge funds and other portfolio managers ended the last week of 2023 with the most new bearish positions in futures and options contracts since March and the second-largest jump in weekly shorts additions since 2017.
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The reason why we prefer to be on the long side is because of supply and demand balance, which points to a bullish trend. The outsized surplus in January is expected to shrink on voluntary cuts by OPEC+ and there are chances of another oil field in Libya going offline. U.S crude oil supply will continue growing in 2024, but at a slower clip.
There is some optimism from traders that Brent could reach $110 by April although we do not see such a strong price rise. The $110/$130 call option spreads on Brent Crude for May and June have attracted bets equivalent to around 30 million barrels according to Bloomberg reports. The buyers of this particular option spread would profit if oil prices hit $110 per barrel by the end of March and end of April, when the May and June option contracts expire, respectively.
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So we believe the downside is limited but the upside will be capped around 86$-90$. However right now fundamentals point to bullish trend be it less surplus going forward or Red Sea tensions, any dip around 5900 is a buying opportunity with expected target of 6200-6300 and stoploss of 5800 in MCX.
