Oil Fundamental Forecast – March 21, 2017

Crude oil futures started the week under pressure despite news that support for extending OPEC’s six-month deal to cut output, trim the global supply and stabilize prices may be gaining traction. Sellers choose to react to worries about growing U.S. oil output and high inventories, mostly in reaction to last week’s increased rig count.

U.S. May West Texas Intermediate Crude Oil finished the session at $48.91, down $0.40 or -0.81%. International June Brent Crude Oil closed at $51.79, down $0.16 or -0.31%.

The biggest response came from the Brent contract which spiked into positive territory on the OPEC news before turning lower into the close.

Forecast

Although some investors believe that the massive liquidation from long positions by hedge and commodity fund traders may be a bearish indicator, contrary thinking suggests this may actually be good news because it creates new room for expansion to the upside.

Last week speculators cut more than 150,000 contracts betting on firmer U.S. and Brent oil prices, a record high.

According to energy services company Baker Hughes, Inc., producers added 14 oil rigs last week, bringing the total of producing rigs up to 631, the most since September 2015. If this trend continues then is likely to support estimates for higher production over the near-term.

Also weighing on prices is growing concerns about the effectiveness of the deal between members of OPEC and other non-member producers.

There is no question that OPEC is going to have to extend or even increase production cuts, or prices could drop further. U.S. shale companies are producing at a more vigorous pace than earlier in the year. This is likely to continue to pressure prices and not likely to stop until prices hit an unprofitable price level.

Prices could stabilize if OPEC and the other producers start to talk seriously about extending the program. The stabilization is likely to be short-covering at first, but could turn into real buying once an actual deal is reached.

The daily chart strongly suggests that the key to today’s price action is likely to be determined by trader reaction to the short-term pivot level at $48.93. If buyers can overcome this price level then $50.14, this may be the first indication that investors are starting to buy into the idea that an extension is coming.