Oil Fundamental Forecast – September 20, 2016

Crude oil futures gave up most of their gains on Monday before settling at $43.23, up $0.20 or 0.46%. Brent crude futures rose 32 cents, or 0.7 percent to settle at $46.09.

Early in the session, West Texas Intermediate futures surged as much as 2 percent on speculation that OPEC and other major oil producers could agree to a market support deal (production freeze or output reduction) and clashes in Libya disrupted attempts to boost crude exports that were announced just last week.

Crude oil prices were also supported by a lower U.S. Dollar which fell ahead of Wednesday’s U.S. Federal Reserve interest rate decision. Traders are pricing in about a 12% chance of a rate hike. Holding rates unchanged could be supportive for oil prices because it will likely pressure the dollar. A lower dollar could lead to increased demand for dollar-denominated crude oil.

FORECAST

The weak close in crude oil after the early session surge was disappointing, but it just proves how difficult it will be to sustain a rally unless there is an actual deal to cut production struck by OPEC and non-OPEC countries. Jaw-boning at this point is not going to sustain a rally and Monday’s price action serves as proof that traders want to see something in writing. OPEC and non-OPEC countries are scheduled to hold an informal meeting to discuss a production freeze next week in Algeria.

Traders are mixed about whether a deal will be made. This could lead to two-sided trading leading up to next week’s meeting. Bullish traders cite evidence that investors are coming in on price dips to support their visions of a rally. Hedge funds have also increased their long positions in Brent which suggests prices may be stabilizing.

Bearish traders believe it will be too difficult to control production. Iran is increasing production. Libya will increase production once it overcomes the disruptions that supported prices on Monday. In the meantime, there are plans for Nigeria to come back online after solving its disruption issues with terrorists. Finally, Russian, which keeps saying it wants to see a production freeze, is expected to bring another 200,000 barrels more to market by the end of the year as it begins to see huge production from its major field in Caspian.

Traders should look for crude oil prices to trend lower early in the session due to a carryover of selling pressure from Monday’s weak close. Buyers may come in if the dollar falls substantially ahead of the Fed announcement on Wednesday. The market may also find support if rumors persist that a production freeze deal is in the works. All of this adds up to a sideways trade.

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