Oil Fundamental Forecast – September 30, 2016

November West Texas Intermediate Crude Oil futures are trading lower on Friday. There was no follow-through to the upside following Thursday’s spike to the upside. The market still appears to be trying to build upside momentum following Wednesday’s decision by OPEC to initiate a plan to curb output.

Investors are mixed about the deal that would limit the output by OPEC and other major exporting countries. One problem is the lack of details about the plan. Given the history of these deals to collapse before actually being implement, one can’t blame traders for being skeptical that the cartel can make this one work.

Furthermore, shortly before the decision was made, the U.S. Commodity Futures Trading Commission’s Commitment of Traders report showed that the number of hedge funds short crude oil had reached a record level. This raises questions about the quality of the buying that trigger the 6% price rise on Wednesday.

The size of the number of short-sellers in the market makes one think that the rally was mostly short-covering rather than new buying. Rallies generated by short-covering tend to fail because there is no support in there to actually prop up prices.

It doesn’t make a whole lot of sense to start buying strength near the $48.00 level which just 48-hours ago the market was trading in the $45.00 to $44.00 range and especially since the buying is based on a deal that hasn’t even been finalized yet. If I’m right in my assessment then a break back to at least the $46.00 to $45.50 range may even be healthy for the longer-term prospects of crude oil since it will signal that real money is coming in to support prices.

The true test of the strength of this market and trader belief that OPEC will be successful in implementing its plan will be trader reaction to the recent top at $48.00. Taking out this level with conviction will be a strong sign that investors believe this deal will work in the long-run.

So going into the week-end we essentially are waiting to see if the buying is strong enough to take out $48.00 and move towards the psychological $50.00 level, or if buyers would prefer to buy a dip back into a value zone at $46.00 to $45.00.

Due to the fact that the deal won’t be finalized until November, traders have to expect wild swings because after all, the news of the plan was a surprise and caught most of the bearish hedge funds on the wrong side of the market.