Oil Fundamental Forecast – February 17, 2017

U.S. April West Texas Intermediate and international Brent crude oil are trading slightly higher early Friday, following a tumultuous trade on Thursday. Aggressive trading by both the bulls and the bears helped form an outside move on the daily chart before settling higher. Once again, the price action strongly demonstrated that oil is rangebound as the market found both support and resistance inside key technical retracement zones.

The catalyst behind the choppy trade on Thursday were reports OPEC could extend its oil supply-reduction pact with non-members and might even apply deeper cuts if global crude inventories failed to drop to a targeted level.

Early in the session, prices were pressured by increasing U.S. production as investors continued to react to Wednesday’s bearish weekly U.S. Energy Information Administration’s inventory report. This news seemed to offset any bullish news from OPEC regarding increasing compliance with its plan to reduce output.

In other news, the surprisingly high level of adherence to OPEC’s plan has kept the hedge funds actively involved on the long side of the market. In this case, they seem to be coming in on every meaningful dip in prices to add to their already large positions. However, as the market nears the high end of the trading range, the buying dries up, encouraging short-term investors to take profits. That’s the way the market has been trading since early January. Bullish traders like crude oil but only if they can get value and hate it when prices rise to high.

According to data from the U.S. Commodity Futures Trading Commission, as of last week, non-commercial traders had a net long position of 477,000 U.S. crude contracts, just short of the previous week’s record long level.

Forecast

Look for crude oil prices to firm if the story about OPEC extending its output deal gains traction. However, due to the huge amount of U.S. supply, gains are likely to remain limited. Furthermore, OPEC is not likely to visit the possibility of an extension until closer to the expiration of the old deal, which means we may not see any formal changes until at least May.

Additionally, an OPEC source even said that the pact could be extended if all major producers showed “effective cooperation.” This means that there is going to have to be empirical evidence presented and probably another special meeting before anything can be done about extending the deal.