Oil Fundamental Forecast – September 26, 2016

After rallying most of the week, crude oil futures dropped sharply lower on Friday. The November WTI contract managed to post a 1.97% gain for the week even after tumbling 3.97% on Friday to finish down $1.84 at $46.32.

At one point on Friday, crude oil futures were down over 4 percent, cutting into most of its weekly gains, as traders reacted viciously to a report that Saudi Arabia did not expect an agreement at talks next week among major crude exporters aimed at freezing production.

The selling was triggered after Bloomberg reported that the Saudi’s did not expect a “decision” at the informal meeting set for Algiers on September 26 to September 28. Bloomberg cited a “delegate” as the source, according to traders who saw the report.

On the bullish side of the news, the market received support early in the session as investors reacted to a Reuters report that Saudi Arabia had offered to reduce production if rival Iran caps its own output this year. Traders said that the Reuters report was based on sources who were familiar with discussions between the two sides.

We can look at Friday’s action a few ways. Firstly, since August 9 when the phrase “informal talks” began circulating in the oil markets, my first reaction was great, at least they are sitting down to discuss the matter. At no time did I ever think there were be a “formal” agreement during a session of “informal” talk.

Whatever happened to reporting who, what, when and why? I think Bloomberg and Reuters tried to stir the pot a little by reporting rumors from unnamed sources and burned traders on both sides of the market.

Finally, as far as the Reuters news is concerned, where was the response from Iran to the Saudi’s so-called proposal? They only printed the bullish side of the story. It would have been nice to hear from Iran on the proposal. I would’ve been more inclined to support the long side of the market on a rumor if the Saudis and Iran has both come out saying that they were in talks.

My point is that the market reacted to two seemingly contradictory rumors. This was not your typical buy the rumor, sell the fact situation. So be careful this week reacting to the stories coming out of Algiers because I’m sure there are going to be quite a few.

FORECAST

As far as the price action and direction on Monday is concerned, I think that crude oil traders are going to need at least a day to lick their wounds following Friday’s debacle. Holding on to some of last week’s gains should help the bullish traders to recover quickly. Erasing all of the week’s gains would’ve send a strong bearish signal to investors.

Because of the volatility created by Friday’s price action, I believe investors are going to play the market tight on Monday, setting up the possibility of an inside range. Of course, there are going to be stories coming out of the informal meeting so we could see some volatility due to headline reactions.

The headline the bullish traders would like to see is one that says Saudi Arabia and Iran are discussing a production freeze. Then I’d like to see a headline that says Russia is brokering a deal between Saudi Arabia and Iran.

Because just like the discussions in Doha in April, I don’t think a deal will get done unless Saudi Arabia and Iran are on the same page.