Oil Price Fundamental Daily Forecast – Output Cut Extension Not Enough for Bullish Oil Investors

U.S. West Texas Intermediate and internationally-favored Brent crude oil closed nearly 5% lower on Thursday after OPEC disappointed investors by failing to agree to deeper production cuts along with its approved nine-month extension.

July WTI crude oil settled at $48.90, down $2.46 or -4.79%. August Brent crude oil closed at $51.77, down $2.47 or -4.55%.

Based on the price action, it looks as if we had a classic “buy the rumor, sell the fact” situation. Speculators had been driving the market higher since the first week in May in anticipation of a six to nine month extension.

However, after investors discovered that the negotiations for the extension would go smoothly, they wanted more. Many had priced in deeper production cuts. When the OPEC-led group failed to deliver the goods, the aggressively long hedge and commodity funds, started booking profits and pairing positions. This led to further liquidation by small speculators, sending the market into a freefall.

Thursday’s dramatic move also triggered bearish technical signals. The closing price reversal top formed by the steep sell-off signals that the selling is greater than the buying near the $50.00 to $52.00 range.

Based on the chart pattern, we’re looking for follow-through selling today that should send the WTI contract into at least $48.07 to $47.14 and the Brent contract into its short-term retracement zone at $51.14 to $50.25.

Since the sell-off caught many traders by surprise and was likely led by long liquidation, we could see a rebound rally if support can be established inside the WTI and Brent retracement zones. This could trigger a short-covering that will likely set up the next shorting opportunity.

In my opinion, agreeing to the nine month agreement without deeper production cuts likely means that U.S. production will increase. This, combined with lower demand, could keep a lid on crude oil prices into the end of the year.