U.S. West Texas Intermediate crude oil finished 2016 higher in what can best be described as a tumultuous trade. After a break early in the year, the market stabilized to trade sideways for several months before posting a strong rally into the end of the year after OPEC and other OPEC Non-members agreed to cut production on January 1 in order to reduce the global supply glut and stabilize prices.
We expected to see a firm opening this week as investors were likely to respond positively to the official start of the deal agreed by OPEC and non-OPEC members to reduce output by about 1.8 million barrels per day.
Adherence to the program will likely be difficult for some members give the past history of such deals. Therefore, OPEC will start monitoring the results only three weeks after its start. On January 21-22, the cartel and several non-members will meet in an effort the monitor adherence to the program and to address any problems that have arisen since it started. This is going to tell us a lot about whether the program will succeed.
I expect prices to be underpinned throughout the month because of optimism over the production cuts, but I’d be surprised by a huge breakout to the upside until we can see if the program is gaining traction.
Market gains could be capped in January by the rising U.S. Dollar and U.S. production.
Weekly March West Texas Intermediate Crude Oil
(Click to enlarge)