Oil prices will likely trade in a tight range this week as investors remain reluctant to take on large bets until the framework of a deal aimed at averting the "fiscal cliff" in the U.S. becomes clearer, according to CNBC's latest survey of oil market sentiment.
Four out of ten of this week's survey respondents expect oil prices to gain this week, four said prices will hold at current levels while two said prices may fall. U.S. crude futures were 0.7 percent higher last week and held in a trading range between $85 and $90 a barrel for most of November.
"The 'cliff' is the big issue," said Mark Waggoner, President of Excel Futures Inc., who holds a 'bearish' view on crude oil markets this week. "We've seen no substantial headway in Congress yet. Once the 'cliff' is removed expect a rally to start."
The White House and Congressional Republicans remain at loggerheads over how to design a deficit-reduction package, with just a few weeks remaining before $600 billion in scheduled tax increases and spending cuts begin in January.
"We find traders are remaining very cautious about oil, refusing to extend their bets in the current volatile environment," said Justin Harper, Market Strategist at IG Markets, adding that of the firm's clients currently trading oil, 69 percent hold long positions, or bullish bets, down sharply from 87 percent in the prior week.
"While economic data may be slightly improving, energy markets are being dictated by 'fiscal cliff' negotiations. With so much discussion and differing views on the progress being made to divert $600 billion of tax hikes and spending cuts, we are in for a rollercoaster ride as we head to the year end," he added.
Commodity analysts at ANZ said that U.S. futures data showing a 7 percent build in non-commercial short-oil positions and non-commercial longs liquidating by 4 percent implied "a bearish view on prices." They added that improvements in the official Chinese Purchasing Managers' Index over the weekend should "put a floor" under prices, but "ongoing uncertainty in the U.S. will likely generate more sideway moves."
Some, however, see scope for compromise in U.S. budget negotiations. "Markets won't want to see uncertainty going into the New Year," Martin Lakos of Macquarie Private Wealth told CNBC's "Squawk Box".
Headwinds from Europe also refuse to die down. The latest body blow for the euro zone came after ratings agency Moody's downgraded the region's two rescue funds by one notch to AA1.
Still, investors have reason to be positive about demand from emerging-market giant China after official data showed factory activity climbed to a seven-month high in November, while private forecaster HSBC's final reading on manufacturing hit a 13-month peak. China's economy has "troughed here," Julius Baer's Mark Matthews told CNBC's "Cash Flow".
The recent bounce in crude prices "possibly has another $2-3 dollars to the upside but we've started to gear our portfolio to benefit from a move lower," said Kirk Howell, Partner at Spy Ridge Capital.
"Declining supply or a drastic worsening of the situation in the Middle East would change our stance. We believe market participants have become fairly complacent with the range-bound trading we've seen in most stocks and commodities and are wary there could be a rude awakening soon," he added.
Though the turmoil in the Middle East will remain a wild card for the oil markets, many investors believe ample supply and relatively weak demand caused by still slow global growth will help keep a lid on prices.
"Brent is right in the middle of the range that we expect for it," said Societe Generale's Michael Wittner. "The sluggish macro outlook sets the ceiling for the range, and the geopolitical risks, mainly from Iran and Syria, set the floor."
From a technical perspective, Dhiren Sarin, Chief Technical Strategist for Asia-Pacific at Barclays Capital said though 'neutral' for the week, any break above the $106 to $112.25 a barrel range in Brent crude "would turn us bullish and alternatively, on dips towards the $106/107 area we would look for basing signs."