Oil Fundamental Analysis – Forecast for the Week of September 26, 2016

Crude oil futures posted solid gains early in the week, however, surprise news at the end of the week drove prices sharply lower. The market was able to hold on to some of its weekly gains, but the damage was done because the weak close shifted momentum to the downside and this could translate into lower prices this week. November WTI Crude Oil futures finished the week at $44.48, up $0.86 or +1.97%.

Oil prices were underpinned early in the week by optimism ahead of this week’s informal meeting between OPEC and non-OPEC producers in Algiers on September 26 – September 28. This optimism was supported by positive statements from Saudi Arabia.

Prices surged as much as 3 percent on September 21 after a surprise drop in crude stockpiles reported by the U.S. government, marking a third weekly decline.

According to the U.S. Energy Information Administration (EIA), domestic crude inventory fell by 6.2 million barrels for the week-ended September 16. Traders were looking for a 3.4 million drawdown.

The market finished the week under heavy selling pressure with oil prices dropping nearly 4 percent on Friday, paring weekly gains, on a report that Saudi Arabia did not expect an agreement at the talks in Algeria.

In other news, the U.S. oil drilling rig count was up by 2 to 418, according to Baker Hughes.

FORECAST

Headlines from OPEC’s informal meeting in Algiers will likely dominate the news later this week.

Unless someone comes in to dispute Friday’s news that Saudi Arabia does not expect a decision on production in Algiers, prices are likely to remain under pressure this week.

The recent string of inventory increases as reported by the EIA may also come to an end this week. This could put further pressure on an already unstable market. This assessment is being supported by a report from energy monitoring service Genscape that mentioned a build of about 213,000 barrels at the Cushing, Oklahoma delivery base for WTI futures for the week-ended September 20.

This Genscape number is in addition to the build of 526,000 barrels at Cushing reported by the EIA for the week-ended September 16. The combination of the two measurements suggests that total U.S. stockpiles may start climbing again soon.

Saudi Arabia, Iran and Russian have all increased output recently with Russian oil output rising to a new record high above 11 million barrels per day. Libya and Nigeria are also set up for increased production.

Simply stated, if a deal to curb production can’t be reached this week in Algiers then coupled with the high U.S. stockpiles and the increased global production, crude oil prices are likely to finish sharply lower this week.

The wildcard is the OPEC/non-OPEC production freeze agreement.