Oil Fundamental Forecast – November 21, 2016

Crude oil prices rose on Friday as investors ignored the stronger U.S. Dollar, the global supply glut and a rising U.S. oil rig count and instead focused on the possibility of a production freeze agreement by OPEC when it means on November 30 in Vienna.

January WTI crude oil closed at $46.36, up $0.38 or +0.83%. International Brent crude oil finished at $46.86, up $0.37 or +0.80%.

The dollar continued to strengthen as rising U.S. Treasury yields made the Greenback a more attractive investment. This tends to put a lid on any rallies because it makes crude oil more expensive for foreign investors, leading to lower demand.

The massive amount of supply also caps any rallies and last week triggered a short-term break.

Finally, rising oil rig counts means that the U.S. is producing more oil. This may mean that oil producers are gearing up for $50.00 to $55.00 oil if the OPEC proposal is ratified.

Supporting prices last week was speculation that OPEC was moving closer to finalizing its first deal since 2008 to limit output, with most members prepared to offer Iran flexibility on production volumes, oil ministers and sources said.

Most OPEC members appear to be on the same page, but Iran has been the main problem with the cartel moving forward with its plan. OPEC members have proposed Iran cap its oil output at 3.92 million barrels per day (bpd) under a production-limiting deal for the whole group. Iran has previously sent mixed signals, saying it would accept a freeze at between 4 and 4.2 million bpd.

Forecast

Crude oil is expected to open on Monday with a slight upside bias. This is because investors are holding out hope that OPEC will agree to a preliminary deal to freeze output with the official terms of the deal expected to be signed, sealed and delivered at OPEC’s formal meeting on November 30 in Vienna.

The daily chart indicates that January WTI crude oil could rally almost immediately to $47.85 to $49.00 if a deal is announced or down to $44.97 to $44.49 if enough support for the agreement fails to materialize.

There was a positive development over the week-end which makes the deal more likely. Most OPEC members agree with the proposed production cuts, however, there have been issues with Iran. So a compromise may have been struck.

Iran has been increasing output since international sanctions against it were lifted last January. It is expected to be given an exemption if it agrees to cap its production rather than cutting it. Simply stated, Iran gets to keep its output at current levels, but the other OPEC members will have to cut. Meanwhile, Libya, Nigerian and Iraq will get to increase production.

If this story gains traction on Monday when look for higher prices. If OPEC disputes the story then prices may drift sideways to lower.