Oil Fundamental Forecast – January 16, 2017

Crude oil futures closed lower on Friday, a move that led to its first weekly loss in five weeks. Doubts as to whether OPEC’s plan to cut output is working helped put a lid on prices early in the week, while worries over demand helped push prices lower.

U.S. March West Texas Intermediate Crude Oil closed at $53.15, down $0.69 or -1.28%. International March Brent Crude Oil ended Friday’s session at $55.45, down $0.56 or 1.00%.

Bearish traders cite the inability to get 100% compliance in the OPEC/non-OPEC plan to cut production, trim the excess global supply and stabilize prices as one reason for lower prices. Recent data suggest there is about 73% compliance.

Furthermore, the cuts that have been made public seem to center on the Gulf States. I have seen many reports on whether non-OPEC members have even informed their clients of their intent to cut production. Traders also expressed concerns about cooperation from Iraq.

Additionally, although China reported record crude imports of 8.6 million barrels per day (bpd() in December, traders felt that imports could drop in the future due to fears over the overall health of the world’s second-biggest economy.

On the bullish side of the equation, there was some price support from top crude exporter Saudi Arabia. It reported that its output had fallen below 10 million barrels per day to levels not seen since February 2015. It also said that it will announce even deeper cuts in February.

In other news, oil field services firm Baker Hughes reported on Friday that its weekly count of oil rigs operating in the United States fell for the first time in 11 weeks. The count fell by 7 rigs.

Forecast

Today is a bank holiday in the U.S. so this may affect the volume of trade.

The news that the number of producing rigs in the U.S. fell by 7 rigs should not be a concern at this time, but traders will be watching to see if it develops into a trend. If the count starts to trend lower then this may be an early indication that U.S. producers expect lower prices over the near-term.

The charts may indicate a rangebound trade, but we can’t deny the developing downside bias. The charts are also indicating that investors are selling rallies. Some of this selling may be related to the huge open long positions. There may not be any room to rally the market until some of the weaker longs are knocked out.

The price action also suggests that investors want to see hard evidence of compliance with OPEC’s plan to cut production. We aren’t likely to know anything about that until this week-end when OPEC/non-OPEC members meet in Vienna to discuss key issues with the program.

Price are likely to feel pressure until investors get some clarity about who is cutting production and who has yet to do so.