Oil Fundamental Forecast – December 29, 2016

Crude Oil prices surged early on Wednesday, but reversed course on thin-trading to finish lower for the session. The market was up at one point in the session for a fourth consecutive day, but the buying dried up and sellers took over. It seems that investors were reluctant to take a long position during a holiday week into Thursday’s U.S. Energy Information Administration’s weekly inventory report.

March West Texas Intermediate Crude Oil closed at $54.53, down $0.23 or -0.42%. Internationally traded March Brent Crude Oil finished at $56.62, down $0.18 or -0.32%.

Early in the session, investors seemed positive about the long side of the market in anticipation of OPEC’s planned production cuts on January 1. I don’t think this was an issue today since the majority of traders believe that 100% of the OPEC and non-OPEC countries involved in the program are expected to adhere to the rules at the onset.

According to exchange data released at the mid-session, trading was well-below normal on Wednesday with just 189,000 front-month futures contracts changing hands in the West Texas Intermediate market. The daily average is about 525,000. It think this means that Wednesday’s price surge was caused by a volatility spike rather than aggressive buying.

Starting January 1, OPEC and non-OPEC producers are expected to lower production by almost 1.8 million barrels per day (bpd). The success of the program relies on 100% cooperation.

In other news, Iraqi Oil Minister Jabar Ali al-Luaibi said his country would cut supply by 200,000 to 210,000 bpd in January. Last week, Saudi Arabia and Kuwait said they had already told customers to expect supply reductions.

Forecast

Crude oil prices could fall on Thursday, after hitting 18-month highs in some contracts on Wednesday, in reaction to the American Petroleum Institute’s (API) weekly report that showed a build of 4.2 million barrels in U.S. commercial crude inventories the week-ending December 23. Traders were looking for a 1.5 million-barrel draw.

The API data also showed a 2.8 million barrel draw to gasoline stockpiles. This was larger than the one million barrel draw that was predicted.

Crude levels at Cushing, Oklahoma rose for the fourth time in five weeks. During the week-ending December 23, inventories rose 528,000 barrels, in line with expectations.

Lastly, the API reported that distillate inventories came in at 1.7 million barrels.

According to the experts, Thursday’s EIA report is expected to show at 1.3 million barrel draw down.

Due to the thin trading conditions, I expect the markets to follow the bearish API data early in the session. The move the rest of the day will be determined by trader reaction the EIA report.