By Bhavik Patel
Looking at the price reaction after OPEC+ meeting, it seems market may have overreacted. OPEC+ decided on Sunday, in light of increased U.S. production, a slowing rate of demand growth, and high interest rates, to prolong the majority of its oil supply cuts well into 2025.
With 3.66 million bpd of mandatory cuts that were originally scheduled to expire at the end of 2024 and 2.2 million bpd of voluntary cuts by eight members that will expire at the end of June 2024, OPEC+ is presently reducing output by a total of 5.86 million barrels per day (bpd), or around 5.7% of global demand.
After the announcement, there was selloff as Brent fell to four month low at $77 and over $15 lower from April’s high. We believe that the result of excessive macroeconomic pessimism, speculative short selling, and overly enthusiastic algorithmic trading, drove out more fundamentally-based traders, leading to price undershooting.
The phase-out will be conditional depending on the state of global markets at the time with most general asset markets not expecting FOMC to follow all its current forward guidance to the letter regardless of future data and events.
In fact to assuage fears in the market, OPEC+ reassures oil markets over oversupply concerns. Along with Russia’s top oil executive and deputy prime minister, the energy ministers of Saudi Arabia and the United Arab Emirates (UAE) attempted to reassure.
The market on Thursday that OPEC+ is a well-oiled machine and that the market will soon understand the organization has done “the right thing.” This worked as market had covered from the lows of 6073 in MCX to 6300.
On daily scale, trend can still be labeled as bearish because momentum oscillator RSI_14 is around 40, well below its median line of 50. Market has recovered 38.2% retracement taken from the highs of 6728 and lows of 6073 when OPEC+ announced their decision.
So despite market covering some of the losses, it is far from covering its 50% loss which comes around 6400. Any trend reversal is only expected above 6400. Meanwhile traders can deploy short positions in future MCX around Rs. 6350 Jun Future with expected target of Rs. 6200 and stoploss of Rs. 6450.
(Disclaimer: Bhavik Patel is a Senior Commodity/Currency Research Analyst at TradeBulls Securities. Views, recommendations, opinions expressed are personal and do not reflect the official position or policy of Financial Express Online. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)