Oil Fundamental Forecast – December 8, 2016

Crude oil prices closed lower on Wednesday on concerns that production cuts pledged by OPEC and Russia will not be enough to reduce the supply glut in a timely fashion and as U.S. fuel stockpiles rose.

U.S. West Texas Intermediate crude oil futures closed at $49.77, down $1.14 or -2.24%. North Sea Brent crude oil finished the session at $53.00, down $0.52 or -0.97%.

The U.S. WTI futures contract closed below the psychological $50 a barrel level after the U.S. Energy Information Administration reported crude stocks fell the week-ended December 2 as refineries increased output, while gasoline and distillate inventories rose.

According to the EIA, U.S. commercial crude inventories dropped by 2.4 million barrels to a total of 458.8 million barrels. Analysts were looking for a draw of about 1 million barrels.

However, gasoline stocks rose above the estimate. The EIA reported a 3.4 million barrel gain in gasoline stocks compared to a forecast of a 1.9 million barrel increase.

Distillate stockpiles were up by 2.5 million barrels, versus a forecast for a 1.8 million barrel draw down.

Forecast

The selling pressure is likely to continue on Thursday because of doubts OPEC and Russia can pull this deal off. The deal isn’t close to collapsing, but the worries are serious enough to prompt previously optimistic traders to reduce their bullish positions.

The price action suggests investors are likely to drive prices into near-term value zones where investors will then wait and see how the details of the deal unfold over the next several weeks.

Even if the cartel and the non-members move forward with the original output cut proposals, experts doubt that the planned cuts will be big enough to have an impact on supply over the near-term. Some say that based on the current figures, any significant dent to the supply won’t be seen until well into 2017. This is because both OPEC and Russia are producing at record levels.

Additionally, the EIA said on Tuesday it expected domestic crude production for 2016 and 2017 to fall by less than previously expected.

OPEC and Non-OPEC producers meet this weekend in Vienna to hammer out the details of the production cut, which targets an overall reduction of between 1.2 and 1.5 million barrels per day.

The downside objective for WTI traders is $48.62 to $47.72. International Brent is expected to retreat to $51.12 to $50.13 over the near-term. These are considered the value areas.