Oil Fundamental Analysis – Forecast for the Week of December 19, 2016

Crude oil prices closed mixed last week, but nearly unchanged as the news seemed to balance itself throughout the week. The market gapped higher on Monday as the major non-OPEC producers revealed their plans to limit output. However, prices fell after the initial rally as investors continued to doubt whether the production cuts were strong enough to put a dent in the supply glut and whether OPEC and the non-members would actually comply with the plan. However, prices were able to stabilize late in the week after several major players in the cartel announced specific production cuts for January.

March West Texas Intermediate Crude Oil closed at $52.95, down $0.35 or -0.66%. North Sea Brent crude oil for March settled at $55.82, up $0.76 or +1.38%.

Also pressuring oil prices during the week was renewed concerns about an oil glut sparked by rising U.S. crude inventories in storage and a stronger U.S. Dollar due a hawkish Fed. The central bank raised its benchmark rate by 25 basis points while forecasting as many as three rate hikes next year. This boosted the U.S. Dollar, putting pressure on dollar-denominated crude oil.

The U.S. Energy Information Administration reported that crude inventories fell by 2.6 million barrels in the week ended December 9. This was better than analyst expectations for a decrease of 1.6 million barrels. However, it was determined that the draw was due to big drop on the west coast. Traders instead reacted to the bearish Cushing, Oklahoma number that showed the sixth build in seven weeks.

In other news that confused traders, OPEC said it pumped 33.87 million bpd in November, up 150,000 bpd from October. However, the International Energy Agency (IEA) said OPEC pumped about 34.2 million barrels per day last month. That’s about 500,000 bpd above OPEC’s official estimate. If the IEA’s figure is true, that would undermine the effort by OPEC and other producers to cut output.

By the end of the week, conditions had improve enough to produce a rebound rally. This is because some producers showed signs of adhering to the global deal to reduce output.

Oil producers Kuwait, Saudi Arabia and Abu Dhabi said they had notified customer that they would cut supplies in January as part of the effort to balance the oversupplied market.

Finally, oilfield services company Baker Hughes Inc. said Friday that 510 rigs sought oil, an increase of 13 rigs. This is potentially bearish news because it threatens to undermine OPEC’s efforts to cut supply. Furthermore, according to the EIA, U.S. crude production surged about 100,000 barrels a day the week-ending December 9.

Forecast

Crude oil could continue its recovery from last week’s lows next week if the U.S. Dollar weakens and additional OPEC nations start informing customers of their intent to cut supply starting in January. Although the weekly oil supply report will be watched closely, I believe prices are going to be more sensitive to any news regarding adherence to OPEC’s plan to cut production.

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