Oil Fundamental Forecast – October 26, 2016

Crude oil prices were down over 2 percent on Tuesday with U.S. West Texas Intermediate settling below the psychological $50.00 level. Investors were reducing position due to concerns that Wednesday’s U.S. Energy Information Administration weekly inventories report may show a build. Hedge fund and money managers began slashing positions early Monday after Iraq said over the week-end that it wants to be excluded from OPEC’s plan to cut output.

December WTI Crude Oil closed at $49.30, down $1.22 or -2.41%. December Brent Crude Oil finished at $50.25, down $1.21 or – 2.35%.

FORECAST

December WTI Crude Oil futures are expected to trend lower on Wednesday after breaking key support at $49.71. The downside momentum created by the move suggests the market could be headed towards $48.49 to $47.61 over the near-term.

December Brent Crude Oil futures followed a similar trend, weakening after taking out the recent bottom at $50.94. It appears to be headed into a key retracement zone at $49.96 to $49.07 where it could find some support.

I mentioned a week or so ago that crude oil is following the herd theory and that once one hedge fund started to take profits, the others would follow. This appears to be the catalyst behind the current break. All it took was one country expressing its opinion on the production cut deal. The price action suggests that there may be others out there. If the downside pressure continues, then we’re going to have to conclude that doubt about whether the deal can get done is beginning to creep into the markets.

Prices are also expected to come under pressure due to a surge in American crude oil supplies according to the American Petroleum Institute (API) report released late Tuesday. It showed that supplies surged upwards by 4.8 million barrels this week. Traders were looking for an inventory build of only 2 million barrels so this number not only exceeded the estimate, but it nearly wiped out all of last week’s 5.2 million barrel draw down.

Gasoline inventories were also bearish, rising by 1.7 million barrels versus an anticipated draw of one million barrels.

In addition to Iraq’s bearish stance, traders are also concerned that Russia may not be completely on board with OPEC. Venezuela is also trying to get non-OPEC members to cut in proportion to the cartel’s to-be-determined limits.

Wednesday’s EIA inventories report is expected to show a build of 700,000 barrels.

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