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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Big Money Expects OPEC Deal Next Week

U.S. WTI January Crude Oil futures are trading higher for the week, but the strong upside bias from earlier in the week has slowed considerably as investors express uncertainty over whether OPEC will be able to agree to production cuts at next week’s meeting in Vienna. Due to the thin trading conditions, investors seemed to be a little reluctant to take major positions ahead of Thursday’s U.S. holiday and the long week-end before the official meeting of the cartel.

Nonetheless, despite the mid-week position-squaring, the recent price action suggests that investors are optimistic that a deal will be made. Last week’s major reversal to the upside and this week’s subsequent follow-through rally indicate that some short-sellers have been driven out of the market, perhaps setting the table for a new wave of buyers.

The market is also being supported by a number of key news developments. On Thursday, for example, Azerbaijan Energy Minister Natig Aliyev wrote in a local newspaper that he thinks OPEC will probably propose other producers cut their oil production by 880,000 barrels per day for six-months starting from January 2017.

Russian Energy Minister Alexander Novak said on Thursday that he believes Russia could revise down its 2017 oil production plans if a global output freeze pact comes into force. This plan would effectively cut output by 200,000 to 300,000 barrels per day.

Venezuela’s President Nicholas Maduro said on Wednesday and OPEC deal to cut output and hike oil prices was “imminent.”

An OPEC source, however, told Reuters that the cartel has yet to make a final proposal to non-OPEC countries on joint production cuts. These proposed cuts are expected to be discussed on November 28, a couple of days before the official meeting.

Additionally, while it is being generally agreed upon that Iraq, Libya and Nigeria will be given exemptions. One key issue remains: what to do about Iran. Earlier in the week, some news services reported that OPEC had proposed to Iran the opportunity to freeze its output rather than cut it.

Using the chart pattern and price action as my guide, I believe that some form of production cut will be agreed, but I am not sure it will be enough to drive prices much above this year’s highs. It will likely be enough to prop up prices, but the supply overhang is just too much to absorb over the near-term. Therefore, I have to conclude that we’ll probably be looking at a range bound year in 2017.

One factor to consider is the steadily rising number of U.S. oil rigs being put back into production. Prices may initially rise on the news of an agreement, but the rally is likely to be limited because U.S. shale oil drillers are likely to massively increase their own output.

Technical Analysis

(Click to enlarge)

I think the weekly swing chart best explains the short- and the long-term price this year.

According to the weekly swing chart, the main trend is down. The main trend will turn up on a trade through $52.74. The downtrend will resume on a trade though $42.95. That’s a fairly easy concept to grasp because a series of higher tops and higher bottoms means the main trend is up and a series of lower tops and lower bottoms means the main trend is down.

Although the main trend is down, the short-term momentum is up. This shift in momentum was triggered by the weekly closing price reversal bottom at $42.95 the week-ending November 18. The subsequent follow-through to the upside this week confirmed the chart pattern.

The main range is $34.55 to $53.72. This is also the range for the year. Its retracement zone is $44.14 to $41.87.

In August, this zone provided support when the January futures contract bottomed at $42.34. In November, this zone also provided support when the market bottomed at $42.95.

The 50% level at $44.14 should be treated like a long-term pivot. The close above it should be considered bullish and a close below it, bearish.

Despite the downtrend, I have to conclude that there is an upside bias because momentum is up and the market is trading well above the major 50% level.

Conclusion

Combining the close above the 50% level at $44.14 and the recent positive developments, I have to conclude that the major speculators are betting that a deal to cut production will be reached at next week’s meeting in Vienna.

If the news is bullish then look for buyers to go after $52.74 and turn the main trend to up. If the news is bearish then sellers are likely to take the market back under $44.14. If the selling is strong enough to take out $41.87 then crude is likely to finish the year in an extremely weak position. However, I’m not sure the news will be bearish enough to drive the market below this price.

Bearish news will likely mean the market will straddle $44.14 into the end of the year while bullish news will likely mean a trade between $53.72 and $47.85 into the end of the year.




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