Oil Fundamental Forecast – December 5, 2016

Crude oil futures surged into the close on Friday to finish at the high for the day. However, both the U.S. West Texas Intermediate and Brent crude oil contracts failed to take out the previous day’s high although buyers had the opportunity to do so. This makes me wonder if there is a big seller in there, stopping the markets from challenging their October tops.

January WTI crude oil closed at $51.68, up $0.62 or +1.21%. February Brent crude oil finished at $54.46, up $0.52 or +0.96%.

Forecast

If there is a continuation of the rally on Monday, then it is likely to be driven by technical momentum rather than the fundamentals. This is because of the cloud of uncertainty still lingering despite OPEC’s deal to cut production.

For the WTI contract, a sustained breakout over $51.80 will target a pair of tops at $52.68 and $52.74. The key upside target for the Brent contract is $54.53.

If there is no sustained breakout then we could see the start of a sell-off. The nearest down side target for the WTI contract is $48.31. The first target for the Brent contract is $50.72.

The catalyst behind any weakness will be concerns over how the OPEC deal will be implemented and what kind of impact it will actually have on production. This may be why OPEC has called a meeting with non-OPEC producers for December 9.

Additionally, concerns are being raised over the size of the production cuts between OPEC and Russia. Over the week-end, rumors surfaced that the cuts might not be as big as initially anticipated.

Another report is saying that OPEC production actually rose shortly after last week’s deal was announced. Since the cuts aren’t expected to begin until January 2017, producers are trying to squeeze as much profit out of the market until then. Higher production number in December, could pressure prices over the near-term.

Furthermore, traders are also saying that it is just a matter of time before U.S. producers get back into the game. According to energy services firm Baker Hughes, the oil rig count continued to climb last week, up 3 more rigs. Since reaching a low on May 27, producers have added 161 oil rigs, a 51 percent increase. With this, U.S. production is set to edge up.

The major concern is with Russia. If you do the math, Russia agreed to cut its output by 300,000 bpd in early 2017. However, these cuts would be against November levels. On Friday, Russia announced average daily oil production of 11.21 million bpd in November, its highest level in almost 30 years.

If Russia makes its cuts based on the November figure, then its output would remain higher than it was at the peak of the oil glut in the first half of 2016.

Look for lower prices today if there is no follow-through to the upside. Even if there is a technical breakout, the rally is likely to be capped. I believe there are still too many concerns about the OPEC deal to start another rally before there is a price correction.