Oil Fundamental Forecast – January 24, 2017

Crude oil prices were rangebound on Monday with a downside bias. The U.S. West Texas Intermediate crude oil contract and the international Brent crude oil contract posted inside days, which means they traded inside Friday’s range. This typically means trader indecision and impending volatility. The longer they trade in a range, the greater the move once they break out. So my advice to you is to avoid becoming complacent.

The reason for the inside day was a mixed reaction to the news. Bullish traders were driven by optimism surrounding the OPEC/non-OPEC deal to cut output and the weaker U.S. Dollar. Bearish traders were reacting to expectations of increased U.S. production due to the sharp rise in the number or operating oil rigs in the U.S.

March West Texas Intermediate Crude Oil futures closed at $52.75, down $0.47 or -0.88%. March Brent Crude Oil futures ended the session at $55.23, down $0.26 or -0.47%.

Forecast

Crude oil traders have a lot on the table right now. The downside pressure is real because it’s coming from real numbers in the weekly U.S. Energy Information Administration report.

Although the early numbers from the OPEC/Non-OPEC deal suggest most nations are complying with their promises made in December to cut production, it’s going to take a while for these cuts to show up in the global supply numbers. Furthermore, I don’t think it’s fair to start counting until we know for sure there is 100% compliance. So I’m going to take any rallies with a grain of salt.

I think the U.S. Dollar is the wildcard at this time. Trump’s protectionist strategy has put a lot of pressure on the dollar recently. If crude oil traders start to notice this and decide to respond accordingly, then the market may be ripe for a short-covering rally on Tuesday.

Later today, the American Petroleum Institute will report its weekly inventories numbers. Last week, the API reported a 5.0 million barrel draw for the week-ending January 13 compared to an expected 300,000 build. Gasoline supplies surged 9.75 million barrels and distillate stocks rose 1.75 million barrels.

However, the U.S. Energy Information Administration (EIA) reported an increase of 4.1 million barrels in crude oil inventories versus analyst expectations of a 930,000 build.

Because of the huge difference in the reports, today’s API report could trigger a volatile reaction so be prepared.