Oil Fundamental Analysis – Forecast for the Week of November 28, 2016

Crude oil futures had a volatile week as investors shed positions ahead of this week’s major OPEC meeting on November 30 in Vienna. The markets traded higher early in the week on optimism that OPEC and other major producing non-member countries would agree to production cuts in an effort to lower supply and stabilize prices. However, developments during the week, encouraged investors to shed positions ahead of the week-end and this week’s key meeting.

January West Texas Intermediate Crude Oil closed at $46.06, down $0.30 or -0.65%. Internationally-favored February Brent Crude Oil finished at $48.24, up 0.27 or +0.56%.

Last week’s optimistic news included comments from Russian Energy Minister Alexander Novak. He said last Thursday that he believes Russia could revise down its 2017 oil production plans if a global output freeze pact comes into force. This plan would effectively cut output by 200,000 to 300,000 barrels per day.

His statement was followed by comments from Azerbaijan Energy Minister Natig Aliyev, who wrote in a local newspaper that he thinks OPEC will probably propose other producers cut their oil production by 880,000 barrels per day for six-months starting from January 2017.

Finally, Venezuela’s President Nicholas Maduro said last Wednesday that an OPEC deal to cut output and hike oil prices was “imminent.”

Despite the optimistic comments, the week ended with an OPEC source telling Reuters that the cartel has yet to make a final proposal to non-OPEC countries on joint production cuts. These proposed cuts are expected to be discussed on November 28, a couple of days before the official meeting.

Also raising some concerns was the news that Saudi Arabia would be absent from the talks on November 28.

Forecast

I think the deal to cut output will be made but it is going to be a last minute decision. It will be very similar to the decision made in late September. Because of this, I expect investors to sit on their hands and wait for the decision before trading in either direction.

I believe that OPEC will allow Libya, Nigeria and Iraq to continue to produce oil with no limitations. I also believe that a compromise will be reached and that Iran’s output will be capped, but it will not be forced to make any production cuts. In my opinion, this is the only way the deal can go down because Iran is not going to agree to any production cuts.

We’ll probably see a spike to the upside on the news, but if everything comes out as originally proposed back in September, gains are likely to be capped because there is just not enough production being cut to put a major dent in the supply glut. The original proposal in September called for OPEC to trim output to between 32.5 million and 33 million barrels per day, down from an estimated 33.6 million in October.

One factor to consider is the steadily rising number of U.S. oil rigs being put back into production. Prices may initially rise on the news of an agreement, but the rally is likely to be limited because U.S. shale oil drillers are likely to massively increase their own output.