Oil Fundamental Forecast – December 2, 2016

Crude oil prices are trading slightly lower early Friday as some investors took profits after a rapid two-day rally drove the January West Texas Intermediate futures contact to its highest level since October 20. Thursday’s surge to $51.80 fell just short of the $52.68 top set on October 19 and the $52.75 top reached on October 10.

February Brent Crude reached a high of $54.52 on Thursday, taking out its October 19 top at $54.29, but falling short of the October 10 top at $54.73.

Now that the preliminary agreement has been made, leading to the huge price surge, traders are starting to ask for details on the implementation of the actual deal.

The initial deal calls for OPEC members and Russia to reduce crude production by a combined 1.5 million barrels per day.

Forecast

On paper, cutting 1.5 million barrels of production per day seems achievable. However, it will only happen if the parties involved stick to their pledges, and this has been the main issue in the past.

In addition to getting the parties to commit to the deal, traders are also worried about the influence of increased U.S. shale production on prices. This is a huge downside risk for market bulls. Because of this, I can’t see prices trading much above the $55 level over the near-term.

So while I accept that the deal sends a strong message to the market that OPEC is really trying to help the crude oil market find a balance, the details of the plan suggest it is going to take a long time to determine whether it is working or not. The key at this time is for speculators to avoid pushing prices too far out of sync with the actual supply and demand fundamentals.

Furthermore, the deal only addresses the supply issue. Obviously, the effects of the deal will take place faster if there is an increase in demand.

The next few days should tell us how optimistic traders are about the deal, but I suspect we are likely to remain range bound like we have been for most of the year. However, instead of straddling the mid-point of this year’s price range around $48.50, we’re likely to spend most of the time in the upper 1/3 of the yearly price range.