Oil Fundamental Forecast – October 18, 2016

Crude oil prices weakened on Monday, pressured by oversupply concerns. U.S. West Texas Intermediate Crude Oil fell below the psychological $50 level at one point during the session. Volume was extremely high as investors prepared for the October 20 futures contract expiration.

A bearish tone was set early in the trading session after the Iranian vice-president said that his country needs to regain its market share. However, losses were limited because some buyers prevented a steep price slide. They were probably investors expressing confidence in OPEC’s ability to achieve its plan to cut production.

International benchmark Brent Crude Oil closed at $51.51, down $0.44. Earlier in the session, it had traded as high at $52.29. December WTI Crude Oil futures hit a session high at $51.00, but closed at $50.37, down $0.38 or -0.75%.

Also pressuring prices was another increase in the number of U.S. oil rigs. According to Baker Hughes, four rigs were added by U.S. drillers during the week-ended October 14.

Forecast

Tuesday begins with investors worried about the futures contract expiration on October 20. According to exchange records, traders had accumulated a high number of long positions, and now they have to get out of them before contract expiration.

On the bullish side of the equation today, the market is still being supported by expectations that OPEC would take action to support prices in late November when it holds its meeting in Vienna.

Prices could also gain support from a weakening U.S. Dollar that appears to be ready to roll over to the downside after a strong rally. This could increase demand for crude oil because it is a dollar-denominated commodity.

On the bearish side, we have the overextended longs who have to get out of their excessive positions by October 20 per Commodity Futures Trading Commission rules.

We also have supply concerns. In September, OPEC agreed to cut supply to between 32.5 million and 33.0 million barrels per day. It pumped a record 33.6 million barrels per day of crude oil in September, with some members signaling they plan further increases.

Additionally, Iran wants to return its production to levels reached before it was hit by international sanctions in 2012.

Some investors are saying that the plan to cut output is not big enough to chip away at the oversupply especially since demand is low. Also Iran, Libya and Nigeria want to continue to produce at current or increased levels. Russia even said last week that it won’t agree to any production cuts.

Barring any surprise news, WTI crude oil appears to be ready to roll over to the downside. The key price is $49.71. If this price is taken out with conviction then I expect to see heavy hedge fund liquidation. This could eventually take us to $48.46 over the near-term.

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