Oil Fundamental Forecast – October 27, 2016

Both international favorite Brent Crude Oil and U.S. West Texas Intermediate Crude oil closed below the psychological $50.00 level on Wednesday, on doubts OPEC will be able to rally its members and major producer Russia to agree to a coordinated cut in crude oil output.

December Brent Crude Oil futures closed at $49.98, down $0.27 or -0.54%. December WTI Crude Oil finished at $49.18, down $0.12 or -0.24%.

The market opened under pressure on Wednesday as investors reacted to a bearish inventories report from the American Petroleum Institute. Crude oil found support and actually moved higher for the session after the U.S. Energy Information Administration’s weekly inventory report showed a 553,000 barrel draw in crude stockpiles to 468.16 million barrels during the week-ending October 21. This was better than the 700,000K estimate.

The EIA report also showed gasoline inventories fell by 2 million barrels last week.

Furthermore, refineries processed 15.6 million barrels per day of crude oil, up by 182,000 barrels on the previous week, producing 9.8 million barrels of gasoline daily, and 4.5 million tonnes of distillate fuel.

Crude oil futures began to weaken after the report-induced intraday short-covering rally after a close dissection of the EIA report proved the numbers were misleading. Oil analysts said the decline of 533,000 barrels last week was centered on the West Coast, which is isolated from the rest of the network. Further analysis actually showed inventories increased along the East and Gulf Coasts.

Forecast

Wednesday’s price action suggests there is still room to the downside in both Brent and WTI futures contracts. Brent is currently testing a key technical support level at $49.96, but the chart suggests the actual target may be as wide as $49.96 to $49.07. The December WTI chart reveals that $48.49 to $47.61 is the best target zone for this futures contract.

This assessment of the daily chart suggests the selling pressure should continue on Thursday, barring any surprise news.

However, based on the long liquidation taking place at this time and the light shorting pressure, and the possibility of OPEC’s plan to cut output blowing up, I don’t expect any surprise events today. This is because there are just too many countries that have to be satisfied before OPEC can start reducing production.

At this time, the scorecard reads like this:  Saudi Arabia is pushing for the deal and Russia is supporting them. Libya, Nigeria and Iran, all get an exemption. Libya just went back on line. Nigeria is recovering from terrorist attacks and Iran just had its sanctions lifted. All valid reasons for excluding them from the plan.

Two wildcards were revealed this week: Iraq and Venezuela. Aggressive short-sellers are probably betting there are more out there.

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