Oil Fundamental Analysis – Forecast for the Week of October 31, 2016

Crude oil posted its biggest weekly loss since mid-September on doubts about OPEC’s planned output cut. December West Texas Intermediate Crude Oil closed at $48.70, down $2.15 or -4.23%. Brent Crude Oil finished at $49.71, down $2.07 or 4.00%.

The week started with crude oil under pressure after Iraq said last week-end that it wanted to be exempt from production cuts because it needs oil revenue to fight against Islamic State militants. Iraqi officials also challenged OPEC over how it calculates its crude production.

The current deal calls for Libya, Nigeria and Iran to be exempt from any production cuts.

About mid-week, crude oil mounted a short-lived recovery, triggered by a surprise draw down in oil inventories. The Energy Information Administration reported a draw of 600,000 barrels in crude inventories for the week ending October 21. Total crude inventories stood at 468.2 million barrels.

Gasoline inventories were down 2 million barrels. The EIA also said refineries processed 15.6 million barrels per day of crude oil, up by 182,000 barrels on the previous week, producing 9.8 million barrels of gasoline daily, and 4.5 million tonnes of distillate fuel.

Oil services company Baker Hughes reported Friday that the number of oil rigs operating in U.S. oil fields dropped for the first time since June. The oil rig count fell by 2 to 441. Baker Hughes had reported steady rig additions for 17 consecutive weeks.

Forecast

December WTI Crude Oil closed near its low for the week so unless something bullish occurs over the week-end, the market is likely to open the new week under pressure. The first downside target is $48.00 to $47.00. This zone represents 50% to 61.8% of the $43.77 to $52.22 main range. This area is followed by another target zone at $46.90 to $45.62.

December Brent Crude Oil is also testing a short-term retracement zone at $49.67 to $48.71. This is followed by $48.09 to $46.76.

So technically, crude oil is close to potential support areas. This means the markets are going through a normal correction. This areas could prove to be strong value zones if the fundamentals turn bullish again.

Based on the price action earlier in the month, the market accepts the fact that any deal by OPEC to curtail production is a good idea, just look at the price action. So this week, they are going to try to fix any issues preventing them from achieving their goals of lower production and higher prices.

OPEC already started to take steps to shore up the deal. On Friday, officials from OPEC and other non-member producers such as Russia started two-day negotiations on Friday on limiting output to curb a global glut that has weighed on prices for two years.

As of late Friday, officials meeting in Vienna had not yet agreed on any details of the planned output cuts. All we still know is that Iran continues to oppose the move. Dow Jones reported the technical meeting was deadlocked as Iran and Iraq disputed the data, with Iran saying OPEC underestimates its production.

The direction of the WTI futures contract this week will be determined by trader reaction to $48.00 this week. The Brent futures contract to $49.67. Look for a rally to develop over these levels if Iraq decides to support OPEC’s decision to cut output. Further pressure should develop if Iraq decides to continue to reject the idea of output cuts.

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