Oil Fundamental Analysis – Forecast for the Week of December 12, 2016

Crude oil prices see-sawed last week, first weakening on concerns over whether non-OPEC members would agree to cut output enough to boost OPEC’s own pledge to limit production, then rallying on optimism that they would reach an agreement.

March West Texas Intermediate Crude Oil futures finished the week at $53.30, down $0.22 or -0.41%. North Sea March Brent Crude Oil closed at $55.06, down $0.08 or -0.15%.

A strong U.S. Dollar also put a lid on the dollar-denominated crude oil rally. It rose on expectations of a 25-basis point rate hike by the Fed on December 14. The Fed is also expected to give rate expectations for 2017.

Also contributing to the dollar’s strength was a weaker Euro. The Euro plunged at the end of the week after the European Central Bank decided to cut its monthly asset purchases but extend the program until the end of 2017.

Oil prices declined mid-week after the release of a bearish petroleum inventory report and doubts that production cuts promised by heavyweights OPEC and Russia would be deep enough to end the supply glut that has been plaguing the market for about 2 years.

According to the U.S. Energy Information Administration (EIA), crude inventories fell 2.4 million barrels during the week-ended December 2. This exceeded the 1 million-barrel draw down that was forecast.

The oil stocks number was ok, but stocks at Cushing, Oklahoma, the delivery hub for U.S. crude oil futures, however, increased by 3.8 million barrels the week-ended December 2. This was the biggest increase since 2009.

The main market driver was the steep rise in the oil products. Gasoline stocks rose by 3.4 million barrels, compared with a 1.9-million barrel gain. Distillate stockpiles were up 2.5 million barrels versus expectations for a 1.8 million-barrel increase, according to the EIA.

The EIA also said it expected U.S. crude oil production for 2016 and 2017 to fall by less than previously expected.

Finally, at the end of the week, oilfield services company Baker Hughes Inc. reported that the number of rigs exploring for oil and natural gas in the U.S. increased by 27 last week to 624.

Forecast

Crude oil prices are likely to trade higher next week in reaction to major news announced over the week-end.

Saudi Arabia hinted that it’s ready to cut oil production more than it indicated in its original agreement from two-weeks ago. The surprise announcement was made minutes after Russia and several non-OPEC producers pledge to curb output next year.

Over the week-end, non-OPEC countries agreed to reduce production by 558,000 barrels a day. Shortly after this announcement was released, Saudi oil minister Khalid al-Falih said, “I can tell you with absolute certainty that effective January 1 we’re going to cut and cut substantially to be below the level that we have committed to on November 30.”

Based on this comment, I wouldn’t be surprised by a “gap and go” opening on Monday.