Oil Fundamental Analysis – Forecast for the Week of October 17, 2016

Crude oil prices may have closed higher last week, but most of its gains took place in one trading session. The rest of the week, the market treaded water as investors had to sort through technically overbought conditions, growing domestic supply, tight product supply and concerns that OPEC’s plan to curb output may be falling apart.

December West Texas Intermediate Crude Oil finished the week at $50.75, up $0.37 or +0.73%. The high for the week was $52.16. Brent futures closed at $51.97.

Oil prices started the week lower, but then reversed to the upside after Russian President Vladimir Putin promised to join the OPEC price freeze. In a speech at an energy conference in Istanbul, Putin gave prices a boost by saying Russia was ready to join the joint measures to cap production and called for other oil exporters to join in the deal.

This rally lasted one day because it was followed by negative comments from Igor Sechin, Russia’s most influential oil executive and head of the state-controlled energy giant Rosneft. Sechin broke the market after he said his company will not cap oil production as part of a possible agreement with OPEC.

Traders were also starting to raise questions about whether the deal would work given the history of OPEC and previous deals to cut output. They believe that OPEC is manipulating sentiment, not supply, citing the fact that it has increased production by almost 900,000 barrels a day since they started to talk about a freeze in February.

In other news, the International Energy Agency said the global crude oversupply could wind down more quickly if OPEC and top oil producer Russia agree to substantial output cuts. However, there cuts may be balanced out by higher production from Libya, Nigeria and Iraq who won’t be asked to trim production.

Also last week, the U.S. Energy Information Administration said U.S. crude stocks rose 4.9 million barrels in the week-ended October 7, more than the 700,000 forecast. However, this bearish news was offset by drawdowns in distillates and gasoline.

On Friday, Baker Hughes reported that U.S. drillers added four oil rigs in the last week, marking the 15^th increase in 16 weeks. The total number of oil rigs operating in U.S. fields stood at 432, compared with 595 at this time last year. Traders showed little reaction to the news.

FORECAST

This could be the week where oil prices start their assent towards $55.00 per barrel, or begin their descent into $48.46 to $47.59. If there is a break, it will likely occur if sellers can take out $49.71. The upside breakout level is $52.16.

Fundamentally, the crude oil market is going through a glut, however, refined product inventory is tight. This may be the only reason why prices are holding up so well. If this week’s EIA number come out bearish for crude, gasoline and distillates then look out to the downside.

This market is being driven by hedge funds and the herd theory. If one hedge fund starts to sell heavily, chances are they are all going to pile on. This could trigger an acceleration to the downside.

I can see a spike to the upside coming if Russia and Saudi Arabia announce the size of the production they are willing to slash. This would be a bullish surprise. However, I think most of the market understands the deal after two weeks of speculation so it is going to take a surprise to trigger another surge in prices above $52.16.