Oil Price Fundamental Daily Forecast – Saudi’s Take First Step Toward Stabilizing Prices By Cutting Exports in December

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures traded over 1 percent higher earlier in the session, but has since given back close to half of its gains as we approach the regular session opening. The catalyst behind, the largest one-day advance in nearly a month is the news that OPEC and its allies may be considering an output cut of 1 million barrels per day due to softening demand.

At 1158 GMT, January WTI crude oil is trading $60.64, up $0.28 or +0.46%. Earlier in the session, the market traded as high at $61.44. January Brent crude oil is at $70.87, up $0.89 or +1.04%. It reached a high of $71.86 earlier in the day.

The news over the week-end is a positive first step toward stabilizing crude oil prices, but OPEC and other non-OPEC producers know the drill since they faced a similar battle over two years ago. They have to figure out a way to cut production. They also have to worry about themselves because they are going to have a hard time convincing the U.S. producers to reduce output after they raised the rig count again last week.

According to reports on Sunday, Saudi Arabia, the world’s largest oil exporter said it would cut its shipments by half a million barrels per day in December due to seasonally lower demand.

Additionally, Saudi Energy Minister Khalid al-Falih said on Monday OPEC and its partners agree that technical analysis shows a need to cut oil supply next year by around 1 million bpd from October levels to avoid an unwelcome build-up of unused crude.

Furthermore, an official from group member Kuwait said on Monday major oil exporters over the weekend had “discussed a proposal for some kind of cut in (crude) supply next year”, although the official did not provide any detail.

Forecast

Prices are trading slightly higher as we approach the U.S. opening. This is no surprise because the breaking story calls for lower production and this may be the excuse a few of the short-sellers need to encourage them to start booking profits. However, the story lacks the substance to turn the bears into bulls.

Typically, the first move to the upside after a prolonged move down in terms of price and time is short-covering. We got a little taste of that early Monday, but the short-covering rally was not enough to convince me that the bottom is in. All we saw was light profit-taking and a few of the weaker short-sellers spooked out of the market by the news.

Going forward, we’re going to have to start watching the hedge fund and money manager activity. Since they took the market down, they’re likely to take it up.

Furthermore, OPEC is only one part of the equation. They still have to find a way to convince the Russians to cut production after the country took months to increase output. Additionally, OPEC has no influence on U.S. production. And if U.S. producers were willing to increase the number of rigs during a 20-percent decline, they are may even increase even more if prices start to recover.