Oil Fundamental Forecast – October 28, 2016

U.S. West Texas Intermediate Crude Oil posted an inside move on Thursday, but still managed to close higher after 3-days of selling pressure. The rally into the close appears to have been fueled by short-covering following a reported drop in U.S. crude inventories stored at the Cushing, Oklahoma, delivery hub, and as commitments from Gulf OPEC members mitigated lingering doubts in the market about cooperation from other producers.

According to energy monitoring service Genscape, U.S. crude stockpiles at the Cushing, Oklahoma, delivery hub showed a weekly decrease of 650,000 barrels.

Bearish traders decided to lighten up on the short-side after a report said that energy ministers from Saudi Arabia and Gulf allies told their Russian counterpart this week they were willing to reduce their peak oil output by up to 4 percent.

Internationally-favored December Brent Crude Oil finished the session at $50.47, up $0.49 or +0.98%. U.S. December West Texas Intermediate Crude Oil closed at $49.72, up $0.54 or +1.10%.

Forecast

Oversold technical conditions may have contributed more to Thursday’s rally than the news of the offer from the OPEC Gulf allies to cut production by 4 percent. Despite the rhetoric, doubts are likely to continue to linger on Friday and perhaps over the weekend as to OPEC’s ability to implement the cut. This is likely to lead to renewed selling pressure on Friday.

The difficulty facing traders at this time is what to believe as the truth and what to put aside as false. Some traders want to believe that there are talks going on behind the scenes, while others choose to believe that there are no secrets and that everything traders need to know is out there.

Going into today’s session I’d like to think that OPEC agreed last month to curb output in an effort to boost prices. But that issues have been raised about exemptions from the output cuts. Libya, Nigeria and Iran have been widely expected to be immune from the production cuts since the start of negotiations, but last week-end, Iraq said it wanted to be on that exemption list.

I expect to continue to see volatility in the crude oil market because the earlier rally and the current break have been based on a large amount of speculation. Buyers speculated that OPEC was on track to balance the market sooner-than-expected. Sellers are speculating that the deal is not going to happen.

The choice between bullish and bearish is so close that I have to believe we are going to sit in a trading range with the December WTI Crude Oil market likely to trade down to $48.49 to $47.61 over the near-term. Since the trend is up, buyers are likely to come in on a test of this zone, providing possible support on Friday.