Oil Fundamental Forecast – December 15, 2016

Crude oil prices plunged nearly 4 percent on Wednesday as worries about the global supply glut dominated the trade. The catalysts behind the selling pressure were rising U.S. crude inventories and what sounded like renewed concerns from OPEC.

After a bearish U.S. inventories report led to early session weakness, traders extended the losses into the close after the Federal Reserve hiked its benchmark interest rate and increased its forecast to possibly three rate hikes in 2017. The news drove the U.S. Dollar sharply higher, making dollar-denominated oil imports more expensive to foreign buyers.

North Sea March Brent crude oil closed at $54.65, down $1.74 or -3.09%. March West Texas Intermediate crude oil finished the session at $53.05, down $1.76 or -3.21%.

According to the U.S. Energy Information Administration, crude inventories fell by 2.6 million barrels the week-ending December 9. This was more than the decrease of 1.6 million barrels predicted by traders.

However, traders said the number did not reflect the real situation since it was over-weighted by a big drawdown from the West Coast. They paid more attention to the inventories at Cushing, Oklahoma, the main futures hub. It showed that inventories rose for the sixth week out of seven.

In supply news, OPEC said it pumped 33.87 million barrels per day last month, up 150,000 from October. However, earlier in the week, the International Energy Agency (IEA) said OPEC pumped about 34.2 million bpd in November. The inability to come up with an accurate production figure could develop into a major issue that would undermine the effort by OPEC and other producers to cut output.

Finally, comments from Saudi Energy Minister Khalid al-Falih may have inadvertently been responsible for some of the sell off when he said it would take some time for the market to rebalance after the deal between OPEC and rival producers to limit supplies.

“We expect the impact … in terms of fundamentals to take several months to be reflected on the market,” Falih told reporters.

Forecast

The momentum from Wednesday’s sell-off could spill over into Thursday’s session. The next target is $51.80. If this price fails then prices could continue to break into a value area identified as $50.37 to $48.98.

The price action seems to be indicating that speculators jumped the gun on the potential impact of the OPEC deal to curtail production, reduce supply and stabilize prices. If the current production numbers are right, it is going to take months before we start to see an actual drawdown in the global supply.

This likely means a sideways to lower trade at best will be more suitable to current market conditions.