Oil Fundamental Forecast – September 23, 2016

Crude oil futures closed higher on Thursday with the November West Texas Intermediate futures contract finishing at $46.32, up $0.98 or 2.16%. Brent crude futures closed at $47.63, up $0.80 or +1.71%. The spread between WTI and Brent closed at the tightest level since early August, indicating improved fundamentals for U.S. crude.

The catalysts behind the rally were the surprise drawdown in U.S. crude inventory, the weaker U.S. Dollar and expectations that OPEC and non-OPEC producers will reach a deal to stem production.

On Wednesday, the U.S. Energy Information Administration reported that crude stockpiles fell 6.2 million barrels last week. Traders were looking for a build of 3.4 million barrels. This was the third consecutive weekly draw down and for the month of September, stockpiles have dropped 21 million barrels.

The U.S. Dollar weakened on Thursday in reaction to the Fed’s decision to leave interest rates unchanged, the release of a less-hawkish monetary policy statement than expected, and the reduction in the number of future rate hikes.

Finally, some of the bullish price action was related to speculative buying, driven by optimism that OPEC and non-OPEC members may reach a decision next week to curb production.

FORECAST

Despite the strong price action since Wednesday, WTI crude oil prices are still being capped by a combination of technical and fundamental factors. Technically, the market is running into resistance at $45.72 to $46.35. Thursday’s high was $46.52. This was outside of the zone, in a potentially bullish position. However, the buying wasn’t strong enough to sustain the move and the market pulled back inside the retracement zone.

Some potentially bearish developments may put a lid on any further upside activity on Friday. These include a stronger U.S. Dollar, increased inventory at the Cushing, OK futures hub, several increases on output and uncertainty over when a deal will be struck next week to limit or freeze future production.

Energy monitoring service Genscape is reporting a 213,000 barrel build at Cushing, Oklahoma for WTI futures for the week ended September 20.

There is also news that Russian oil output had hit a new record high above 11 million barrels per day. Libya also increased output with the resumption of its first export of oil since at least 2014. Nigeria is also preparing to go back online at the end of September for the first time since February.

Finally, due to its terrible track record, analysts are not attaching a high chance of a deal to freeze or cut output between OPEC and other producers.

Due to the almost balanced fundamental news, we’re looking for November Crude Oil prices to straddle the key retracement zone at $47.52 to $46.35 most of the session on Friday. This is due to investor indecision. Additionally, we could see a strong upside bias develop if the U.S. Dollar continues to weaken, and a strong downside bias to form if traders decide to square positions ahead of the week-end and next week’s informal talks.