Oil Fundamental Analysis – Forecast for the Week of December 5, 2016

Crude oil futures posted their biggest weekly gain since 2009 last week, following OPEC’s decision to reduce crude output in order to decrease the global supply glut and stabilize prices.

According to the plan, OPEC will reduce production starting in January by 1.2 million barrels per day, or over 3 percent, to 32.5 million bpd.

Although a non-member of OPEC, Russia is a part of the deal. It has promised to gradually cut its crude output by up to 300,000 barrels per day in the first half of 2017. On Friday, oil prices were pressured by new data showing oil output in Russia rose in November to a post-Soviet high and news that Moscow would use its record November oil production as its baseline when it cuts output.

In other news, oilfield services firm Baker Hughes reported the U.S. oil rig count rose by 3 to a total of 477. At this time last year, drillers were operating 545 rigs.

The weaker U.S. Dollar also helped support dollar-denominated crude oil prices.

January West Texas Intermediate Crude Oil finished the week at $51.68, up $5.62, or +12.20%. International Brent Crude Oil closed at $54.46, up $6.22 or +12.89%.

Forecast

After last week’s decision by OPEC, the market will now shift its focus to the implementation and impact of the plan to cut production.

There are still several questions that have to be answered regarding the deal including issues with compliance and the extended role of the non-OPEC countries in the implementation of the plan. Because of these uncertainties, Russia and other non-OPEC producers are set to meet with OPEC on December 9 to hash out some of the details.

Traders are also concerned about Iran because of late developments on Friday. According to the Financial Times, U.S. President-elect Donald Trump’s transition team is examining proposals for new non-nuclear sanctions on Iran.

U.S. President Barack Obama is expected to sign U.S. legislation extending sanctions against Iran for 10 years into law, the White House said on Friday. At the same time, Iran threatened to retaliate against the U.S. Senate’s vote to extend the sanctions. We’ll have to continue to monitor this situation to see if it causes problems with OPEC’s new plan. Iran was likely the last country to agree to OPEC’s plan and evidently, it’s not going to cut production, but rather freeze production.

The direction of the crude oil market this week will be determined by technical momentum. If there is any surprised news next week, it is likely to be towards the bearish side. Because of the number of lingering uncertainties, I don’t believe speculators are going to chase prices higher this week. Therefore, I suspect we are going to see profit-taking and the start of a short-term retracement into a value area.