Oil Price Fundamental Daily Forecast – Lack of Conviction Over Extension Could Lead to Profit-Taking

U.S. West Texas Intermediate and international-benchmark Brent crude oil are trading flat to lower early Monday. The price action suggests traders are a little shy about initiating new major positions as we rapidly approach an OPEC meeting on November 30 when the cartel-led coalition is expected to decide whether to continue output cuts aimed at cutting production, trimming the global supply glut and stabilizing prices.

At 0700 GMT, January WTI crude oil is trading $56.73, up $0.02 or +0.02% and February Brent crude oil is at $62.48, down $0.07 or -0.11%.

Uncertainty is primarily behind the lack of price action. For months, investors have been pricing in an extension of the production cuts beyond the original March 2018 deadline. However, recently doubts were raised about Russia’s willingness to continue to restrain output.

As we approach the November 30 meeting, traders and analysts are beginning to sound less-certain that the OPEC-led group will agree to extend the production cuts.

“(The) OPEC meeting remains the key sector catalyst into year-end… The market expectation is for an extension through 2018, created by OPEC comments early this fall… (but) there is increased risk that OPEC delays the extension decision,” U.S. bank Morgan Stanley said on Monday in a note to clients.

Morgan Stanley said that the question over extended cuts “has shifted to non-OPEC participants’ willingness to extend, primarily Russia”.

Despite the uncertainty, there is evidence that hedge and commodity funds have been adding long positions to their respective portfolios, indicating expectations of rising prices.

In other news, late Friday, oil services firm Baker Hughes said the number of rigs drilling for new oil production remained unchanged in the week to November 17 at 738.

Forecast

The daily January WTI chart is currently testing a short-term technical resistance zone at $56.57 to $56.94. Trader reaction to this zone will set the near-term tone. A sustained move over $56.94 will indicate increased buying. A sustained move under $56.57 will signal the presence of sellers.

The daily February Brent crude oil chart indicates the key resistance zone is $62.71 to $63.11.

Bearish counter-trend sellers are going to come in on a test of these retracement zones in an effort to form a potentially bearish secondary lower top. Bullish traders are going to try to overcome this zone to put the markets in a position to breakout to new highs.

Trader reaction to the retracement zones will also tell us if the hedge funds are increasing their bets on an OPEC extension, or lightening up on the long side.

The hedge funds are sitting on some pretty big long positions. We’ve seen several times earlier in the year that they aren’t always right. If they stop buying strength because of overbought conditions then we could start to see position-squaring which could lead to a short-term correction into support.