Oil Fundamental Forecast – December 7, 2016

Crude oil fell on Tuesday as investors took profits on concerns over production cuts. The lower close broke the market’s 4-day winning streak. Rising production in December by OPEC and Russia suggests that the fuel glut will last well into 2017 even with the planned production cuts to begin in January.

January West Texas Intermediate Natural Gas closed at $50.91, down $0.88 or -1.70%. International February Brent Crude finished the session at $53.52, down $1.42 or -2.58%.

Now that the euphoria created by last week’s production deal appears to have faded, traders are going to take a good look at factors that may undermine the cartel’s objective to trim the supply and stabilize prices. These include Russia’s plans and the response from U.S. shale producers.

Some analysts are saying that adherence to the assigned quotas will be nearly impossible to police and that almost all OPEC members will virtually ignore their assigned production cut levels.

A good example is Russia. In November, it reported average oil production in November of 11.21 million barrels per day, its highest in nearly 30 years. Combined with OPEC, the two produced enough to cover almost half of global oil demand. If Russia makes its production cut based on the November figure, it will only bring production down to levels seen in early 2016.

Other wildcards include Libyan and Nigerian production. Both were given production cut exemptions, but I have seen any limits put on how much they will be allowed to produce.

Traders also expect U.S. shale producers to ramp up output and to go after market share.

Forecast

The daily chart indicates WTI crude may have run into resistance at $52.42 to $52.74. It also shows there is room to the downside with $48.62 to $47.72 the best value zone. Brent crude found sellers at $55.33. It primary downside target is $51.12 to $50.13.

In other news, this week’s American Petroleum Institution (API) report showed the second consecutive week of crude inventory draws that exceeded the forecasts. The report showed a 2.21 million barrel drop in inventories versus a 1.37 million barrel estimate.

Supplies at the Cushing, Oklahoma hub rose 4.01 million barrels versus a forecast of 2.87 million barrels. This was the largest build at the Cushing facility since 2008.

Wednesday’s U.S. Energy Information Administration (EIA) report is expected to show that U.S. crude inventories fell by 1 million barrels the week-ending December 2.