Fundamental Forecast for Oil: Bullish

It was another strong week for Oil, as the Monday pullback to 55.75 brought bulls back in to catapult prices up to another fresh two-year-high. While the more traditional driver of OPEC combined political pressure in the Middle East has been behind much of the gains over the past five months, last week saw the introduction of another bullish driver for WTI as TransCanada’s 590,000 barrel-per-day Keystone pipeline was shutdown after a spill was discovered in South Dakota. This pipeline connects Alberta’s oil sands to refineries in the United States; with a large portion of crude going to Cushing, Oklahoma which is the delivery point for WTI futures.

This disruption in supply sent WTI into backwardation this week, in which forward futures contracts carry a discount as supply constraints build in premium for nearer-dated contracts. As of yet, there is no date for the Keystone pipeline being restored and coming back online, so near-term supplies will likely continue to be restrained. But this simple observation of backwardation would indicate that at least some of this week’s bullish run in Oil prices was driven by supply disruptions of the Keystone pipeline, while there is another bullish factor brewing in the background that will come into clearer focus next week.

Next week brings a vitally important OPEC meeting on Thursday, and this will likely help to shape the supply of the Oil market well into 2018. Already market participants appear to be trying to position-in ahead of time, as anticipation around an extension of production cuts has likely played at least some role in this week’s bullish price action. At issue is the extension of production cuts that were initially announced last year in the effort of supporting Oil prices. Those production cuts are currently set to expire in March of 2018, and over the last couple of weeks, we’ve heard multiple reports indicating that OPEC and Russia have been designing an extension that will carry those cuts for another nine months, to the end of next year. In a report published earlier this morning, Bloomberg indicates that Russia and OPEC have already agreed on the framework of that extension ahead of the November 30th meeting.