Oil Fundamental Analysis – Forecast for the Week of November 7, 2016

Crude oil futures collapsed last week as investors liquidated positions after losing confidence in OPEC’s ability to implement its proposed plan to curtail output. Traders also reacted to a huge increase in supply. U.S. West Texas Intermediate crude oil closed the week at $44.07, down $4.63 or -9.51%. International Brent crude oil finished at $45.58, down $5.10 or -10.06%.

The week started with the news that a meeting in Vienna over the week-end to discuss new lower production levels fell apart with all sides failing to agree on any changes. Barring any secret talks between now and the end of the month, it looks as if OPEC is not going to pick up these talks until its formal meeting on November 30.

We still don’t know too much about the deal. The original proposal called for OPEC to reduce output to 32.5 to 33 million barrels per day in order to boost prices. However, Iran, Nigeria and Libya were granted exemptions from cut backs. The deal started to run into problems after Russia said it wasn’t interested in reducing output. Iraq then also asked for an exemption.

At the end of the week, reports surfaced saying that Saudi Arabia threatened to raise oil output steeply to bring prices down if Iran refused to limit its production.

Also weighing on prices last week was the announcement of a huge inventory build in the U.S. According to the U.S. Energy Information Administration, crude oil stockpiles soared more than 14 million barrels last week, the largest build on record. It also continued to shine a light on the massive global supply glut.

The week-ended with the U.S. oil rig count resuming its climb following a dip the previous week, its first in four months. Last week, U.S. drillers added 9 rigs for a total of 450. At this time last year, there were 572 rigs in operation.

Forecast

Last week’s decline in crude oil erased the entire late September to mid-October rally, or the move set-off by OPEC’s original proposal to cut production. This means that speculators have reduced the chances for the deal to be made to zero-percent. Unless there are behind the scenes talks taking place, it looks as if the best chance for a deal to be made will be at OPEC’s meeting in Vienna on November 30.

This exposes crude oil to further weakness because there is always the possibility that inventories will continue to build.

Although some technical indicators are forecasting a possible bounce in prices due to oversold conditions, the chart pattern suggests there is room to the downside with the main target zone $43.84 to $41.53. Taking out the bottom at $43.77 could trigger a lot of sell stops. Holding below the December 31, 2015 close at $43.83 will mean the market is lower for the year, erasing all of the earlier-in-the-year optimism over the possibility of the market balancing.

Prices could also feel pressure if the battle between Saudi Arabia and Iran escalates. The Saudi’s have the ability to open up their valves and flood this market with crude oil, which would trigger a bearish response from traders.