Oil futures are on track to end October with a gain, but it could be the smallest rise in eight months, as traders weigh the potential success or failure of a plan by major oil producers to cap crude output.
The Organization of the Petroleum Exporting Countries’s formal meeting on Nov. 30 is likely to be the big headline event next month, but market watchers point out that it’s only one of many.
“Oil has created a narrow base after finding itself much higher than the early-2016 bottom,” said Adam Koos, president of Libertas Wealth Management Group. “This base represents indecision on the part of traders, who are more than likely booking profits and waiting to see what price will do over the coming weeks.”
“Unfortunately for oil bulls, there are a lot of clouds on the horizon, including but not limited to:” monthly oil reports from the International Energy Agency, Energy Information Administration and OPEC, data on U.S. shale oil production, and the U.S. presidential election, he said.
As the market headed toward a new month of trading, West Texas Intermediate oil futures CLZ6, -2.13% finished Friday at $48.70 a barrel on the New York Mercantile Exchange, logging for their first weekly loss in six weeks, according to FactSet data. With one trading day left for the month, prices based on the most-active contracts were set to end October with a gain of about 1.1%—which would be the smallest monthly increase since February.
“The shift in OPEC’s stance toward limiting production provided the primary support to modest oil gains in October,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
OPEC announced its plans on Sept. 28 at an informal meeting in Algeria to cap production to between 32.5 million and 33 million barrels a day for its 14-member group.
At the time, it said it wouldn’t complete details of the proposal, including individual quotas, until Nov. 30. With OPEC’s output pegged at about 33.39 million barrels a day in September, members would have to cut production to reach that target.
“An agreement is one thing, implementation of the agreement is something else,” said Anas Alhajji, an independent energy expert and former chief economist at NGP Energy Capital Management.
He described OPEC as “irrelevant”—an assessment that won’t change ”even if members agree on a freeze or a cut or a combination [of] both.”
“A freeze will not eradicate the [supply] surplus,” he said. “In the case of a cut, the agreement is a cover for a cut that would have happened anyway.”
Saudi Arabia production tends to slow this time of year as the country’s domestic demand sees a seasonal slowdown—and with WTI prices trading more than 30% higher year to date, OPEC members have worried about losing market share to non-OPEC producers such as the U.S.
The dollar and the Fed
Oil has also been influenced by moves in the U.S. dollar, and a potential dollar-moving event is set for Nov. 2 when Federal Reserve officials complete a two-day monetary policy meeting.
The central bank isn’t expected to raise rates at that meeting, but may offer clues on the likelihood of one at its last meeting of the year in December.
The U.S. labor market appears to be near full employment from the Fed’s perspective, said Troy Vincent, oil analyst at ClipperData. Given that and other upbeat economic data, he expects to see a 25 basis-point hike in December, “just so the Fed can save face after crying wolf for each and every month this year.”
With most expecting the Fed to raise rates before the end of the year, the dollar has found support. The ICE U.S. Dollar Index a measure of the greenback against a basket of major rivals, was poised to finish the month with a gain of roughly 3%.
Continued strength in the dollar “would be the predictable result, which should begin to pressure oil and commodity prices,” given that they are quoted in the greenback, Vincent said.
Meanwhile, Election Day looms on Nov. 8.
Analysts have pointed out the difficultly in figuring out which presidential nominee would be the better choice for the oil market.
Republican nominee Donald Trump’s goal to make the U.S. completely energy independent and remove restrictions on drilling on federal land makes him appear to be the candidate mostly likely to benefit the oil market, analysts said, but Democratic nominee Hillary Clinton’s plans to make the country a “clean energy superpower” may restrict oil production and actually provide a boost to oil prices.
Vincent said a win by Clinton is likely priced into the oil markets, but if Trump wins, “this would certainly imply some volatility as markets reassess.”
News on Friday that the FBI is restarting a probe into Clinton’s emails, however, may make a win by Clinton more uncertain.
U.S. oil stats
Data from the EIA, meanwhile, has shown growth in domestic production on the back of rising U.S. oil-rig counts.
Oil prices have “leveled off here near month end, reflecting fears of rising U.S. oil production in response to…higher prices,” said U.S. Bank Wealth Management’s Haworth.
Total domestic oil output rose by 40,000 barrels a day to 8.504 million barrels a day for the week ended Oct. 21, according to EIA. Baker Hughes BHI, +8.38% meanwhile, reported Friday that the number of active U.S. rigs drilling for oil fell by 2 for the week to 441, for the first decline since June.
“The key in November will be inventory trends,” said Haworth.
The EIA reported Wednesday that U.S. crude stockpiles unexpectedly fell by 600,000 barrels for the week ended Oct. 21. That was the seventh weekly fall in eight weeks.
“Inventory drawdowns have been relatively strong over the past month, but that may not be the case as we fully enter the winter season, turning back clocks and cutting demand in our typical seasonal fashion,” Haworth said.
“Unless economic growth provides a positive surprise, or there is a surprise shutdown in global production, oil prices are likely to be under pressure in the near term,” he said.