Oil Fundamental Analysis – Forecast for the Week of October 24, 2016

After posting four weeks of higher-highs and higher-lows, crude oil futures finally started to show signs of profit-taking last week. Although we didn’t get a technical reversal on the weekly chart, which would have been a strong indication that the selling is greater than the buying at current price levels, the market looks a little tired as investors continue to wait for more information about OPEC’s planned to cut production.

After reaching a high or $52.22, just $0.06 above the previous week’s high, sellers came in to drive crude oil prices lower. December Crude Oil finished the week at $50.85, up $0.10 or 0.20%. The inability to drive the market convincingly through the previous week’s high may be the first sign that investors may not be willing to buy strength and would rather play for a retracement into a value zone.

Fundamentally, investors were shocked on October 19 when the weekly government inventories report showed a huge drop in inventory. This was the sixth week out of seven that this report showed a drawdown.

According to the U.S. Energy Information Administration, U.S. commercial crude inventories fell by 5.2 million barrels to a total of 468.7 million barrels in the week-ending October 14. Traders were looking for a build of 2.7 million barrels.

Refineries in the U.S. processed an average of 15.4 million barrels of crude per day. This was down almost 200,000 barrels per day from the average 15.6 million barrels during the week-ending October 7.

The EIA also said U.S. crude imports fell by 912,000 barrels per day last week to 6.47 million barrels per day, the lowest since November 2015.

Unlike last week’s rally which was supported by a drawdown in the products, Wednesday’s rally was driven by the drop in crude inventories.

A build of 2.5 million barrels in gasoline stocks surprised traders because they were looking for a drawdown of 1.3 million barrels. Daily gasoline output stood at 9.5 million barrels, down from the previous week’s 9.9 million barrels.

Forecast

Last week’s inventory is history and traders may not know any more about OPEC’s planned production cuts until the cartel’s meeting on November 30 in Vienna so this could create the uncertainty needed to encourage investors to take a look as the situation and pare positions a little after the four-week run-up.

In addition, last week’s price action finally suggested that the powerful U.S. Dollar may finally be exerting its presence on crude oil. Furthermore, China said last week that its output fell 9.8 percent to 3.89 million barrels per day, near its lowest in six years in the second-biggest year-on-year decline on record.

We could see prices retreat this week if the OPEC deal starts to raise some red flags, or if investors start to question demand due to the stronger U.S. Dollar. Last week’s price action suggests that hedge funds may not be willing to buy strength. This may mean we’re due for a break into a value zone.

Watch the price activity at $49.71 this week because if this price fails, we could see an eventual move into the key retracement zone at $48.00 to $47.00. This area represents a very strong value zone which could be attractive to longer-term buyers if tested this week.