Oil Fundamental Forecast – February 2, 2017

U.S. West Texas Intermediate and international Brent crude oil surged on Wednesday in reaction to a geopolitical event that may lead to a breakout over the ranges the markets have been camped in since the first of the year.

Additionally, potentially bullish news regarding compliance with the OPEC/Non-OPEC deal to reduce output was offset by another report showing increased U.S. production.

March WTI Crude Oil futures closed at $53.88, up $1.07 or +2.03%. April Brent Crude Oil finished at $56.80, up $1.22 or +2.20%.

Speculative investors bought crude oil on the thought that the U.S. may pull out of the Iran nuclear deal or impose new sanctions, which could affect Tehran’s ability to continue ramping up oil production.

The idea was supported by heightened tensions between Iran and U.S after U.S. National Security adviser Michael Flynn said the White House is putting Iran “on notice” following its recent ballistic missile tests.

Also supporting the market was a report that Russia planned a gradual cut of about 100,000 barrels per day, or about a third of the planned 300,000 bpd reduction that it pledged in the OPEC deal.

The news about Russia was offset by the weekly EIA report that showed stockpiles of U.S. crude oil rose by 6.5 million barrels during the week-ending January 27. Traders were expecting crude stocks to rise by 3.3 million barrels.

Gasoline stocks were also up 3.9 million barrels. Analysts and traders were looking for a 1 million-barrel gain. Distillate stockpiles increased 1.6 million barrels, versus expectations for a 903,000-barrel drop, according to the EIA.

The bearish supply news was eased somewhat by the news that crude stocks at the Cushing, Oklahoma delivery hub fell by 1.2 million barrels.

Forecast

The strong close and the headline news about Iran may be enough to shake up the sideways market on Friday. The seriousness of this issue makes me think that it is not going to go away after a couple of days. Therefore, I believe the market is going to continue to be underpinned over the near-term.

Technically, we’re only testing a key 50% level at $53.89. However, I expect this price to act like a pivot. Overtaking $53.89 will indicate the presence of buyers. They may create the upside momentum needed to take out a pair of tops at $54.08 and $54.32. This action would change the main trend to up and could trigger an acceleration to the upside.