Oil Fundamental Forecast – October 25, 2016

Crude oil prices fell over 2 percent on Monday before rebounding of its lows. Prices were driven lower by several factors including the news that Iraq said it wanted to be exempt from an OPEC production cut, a stronger U.S. Dollar and a double-digit increase in the number of U.S. operating rigs.

December West Texas Intermediate Crude Oil fell to $49.62 before settling at $50.52, down $0.33 or -0.65%. December Brent Crude Oil touched $50.50 before closing at $51.46, down $0.32 or -0.62%.

The session started under pressure as investors reacted to bearish comments made over the week-end. Iraqi oil minister Jabar Ali al-Luaibi said on Sunday that the country, OPEC’s second largest producer, wanted to be exempt from output reductions as it need more money to fight Islamic State militants.

Current data shows Iraq produced 4.774 million barrels per day in September. This is well below the 9 million bpd that it wants to produce.

The stronger dollar could help limit demand and the increased rigs could be bearish for the supply side.

Helping to boost oil prices from their lows on Monday was data from Genscape that showed a draw of about 1 million barrels of crude at the Cushing, Oklahoma futures hub during the week ending October 21.

Comments from Iran’s deputy oil minister Amir Hossein Zamaninia also helped limit losses. He said Iran would encourage other OPEC members to join the output freeze.

Russia said it had discussed specific mechanisms of a possible deal between Russia and OPEC. This is potentially bullish, however, a decision to join in the output freeze would be considered more bullish for prices.

Forecast

Oil prices are likely to continue to feel pressure over the near-term because of the growing uncertainty over OPEC’s ability to get all of its members to agree to make production cuts. Iran’s request to be excluded from the process was bearish enough news to cause some hedge funds and money managers to lighten up on their long positions.

Brent crude took out a key support price at $50.94 before rallying and WTI Crude Oil penetrated previous support at $49.71. However, without increased selling pressure, the potential breakouts to the downside failed to gain traction.

This price action suggests the market is vulnerable to the downside and that all it is going to take is another country making a similar request to Iraq’s and this rally could crumble fairly quickly.

According to the Brent Crude Oil chart, the best downside target is $49.96 to $49.07. The best target for the WTI contract is $48.49 to $47.61.

We’re likely to hit these targets this week if another country decides it want’s better production cut terms or if the weekly EIA report comes out bearish.

The market could reverse to the upside fairly quickly if Iraq is persuaded to go along with the plan.

Check out our real-time Economic Calendar