Oil Fundamental Forecast – December 6, 2016

Crude oil prices rallied on Monday after some hesitation as investors expressed optimism over OPEC’s plan to cut output beginning in January. After lingering in a range for most of the early session, prices spiked higher with Brent crude rising above $55 a barrel for the first time in 16 months. Since OPEC agreed to the deal last Wednesday, Brent has gained about 19 percent and U.S. West Texas Intermediate is up about 16 percent.

The OPEC deal calls for a production cut of 1.2 million barrels per day starting in January. Non-OPEC producers are expected to agree to add an output cut of 600,000 bpd at another meeting in Vienna on December 10.

February Brent Crude closed the day at $54.94, up $0.48 or +0.88% and January West Texas Intermediate finished the session at $51.79, up $0.11 or +0.21%.

Forecast

Despite the higher close, I wasn’t impressed with the price action on Monday. The WTI contract had a chance to breakout over the October tops at $52.68 and $52.74, but the buying stopped at $52.42. This leads me to suspect the intraday price surge was mainly due to the drop in the U.S. Dollar rather than aggressive buyers.

Brent crude buyers also had a chance to send a message to the bearish doubters but buying also dried up at $55.33, leading to a close under the psychological $55.00 level.

The issue that buyers are dealing with at this time is rising production levels. According to CNBC, crude output is rising in virtually every major export region despite plans by OPEC and Russia to cut production. This is helping to raise concerns that the current fuel glut may linger well into 2017.

If prices begin to fall, it will be due to rising output from within OPEC and Russia.

OPEC is set to start the deal in January by coming off a record production high in November of 34.19 million barrels per day, up from 33.82 million bpd in October.

Issues are also being raised over Russian production. Russia, for example, is toying with the idea of making its cuts based on November production levels. These happened to come in at their highest level in years. If it agreed to make a cut based on this level, it would only bring its output back to a peak hit earlier in the year.

Furthermore, it’s been reported that Transneft, Russia’s pipeline monopoly suggested on Monday a cut to oil output could begin in March.

I don’t think the OPEC and Russia production issues will lead to a complete retracement of last week’s gains, but I do expect to see some sort of a price setback. I don’t see a total collapse of the deal either. I do see a slow start to impact of the production cuts, however. This may mean the market won’t see a substantial reduction in production until well into 2017.