Benchmark oil prices may be vulnerable to further selling pressure with some predicting U.S. crude futures may drop below $90 a barrel this week though a positive jobs report on Friday may help contain the losses.
Oil consumption in the U.S. posted an unexpected drop in December, pulling total demand for 2012 to the lowest annual level since 1996, the U.S government said last Wednesday. Meanwhile, the boom in shale-oil production lifted U.S. crude oil output by 14.6 percent last year to a 17-year high, the Wall Street Journal reported, citing data released Wednesday by the federal Energy Information Administration.
"Investors can no longer avoid the fundamentals of rising inventories and record production in the U.S. as the shale boom continues to alter the long term dynamics of the oil industry," Andrew Su, CEO of Compass Global Markets wrote in a report on Monday. "We expect that (weekly U.S.) stockpiles will once again increase and add further pressure on the prices. At the same time, the risk of market turmoil this week is high and could originate from various events that are unfolding in Europe and the United States."
Manufacturing data released from the euro zone and the U.K. last week showed a contraction in factory output and moderating activity in China, hurting sentiment in the oil markets further. The focus this week turns to U.S. Non-Farm Payrolls data for February scheduled for Friday, with expectations for a gain of 165,000 though this won't be enough to move the unemployment rate from 7.9 percent.
"China seems to be slowing as confirmed by the PMI (Purchasing Manager's Index) results," said Tom Weber, senior commodity advisor at Portfolio Managers, Commodity Futures & Options.
"Europe really is still a mess and the Italian soap opera makes one wonder will it be quicker to choose a Pope than a Premier," said Weber adding that the Federal Reserve Chairman Ben Bernanke's testimony last week "prompts me to believe economic data in the aggregate simply isn't strong enough to point to a recovery."
Weber is maintaining short positions, or bearish bets, on U.S. crude futures and targets support at $89.12, then $87.04.
Compass Global also has a bearish view on oil in the short and medium term. Core short positions established by the firm at just below $97 are now in "significant" profit. "We now expect prices to cascade to below $90 this week. On a break of $90 we will be adding aggressively to our short positions," Compass Global said.
Brent and U.S. crude futures tumbled last week ahead of automatic U.S. budget cuts and after data showed increasing oil production and flagging U.S. demand. U.S. crude dropped $1.37 to settle at $90.68 a barrel on Friday, taking losses for the week to $2.45. The front-month April contract hit a low of $90.04, the weakest since December. Brent recorded a $3.69 a barrel decline for the week, its third consecutive weekly loss, to close at $110.40.
The Sequester Threat
President Barack Obama on Friday signed an order that starts putting into effect across-the-board budget cuts known as the "sequester" after he and congressional leaders failed to find an alternative budget plan, Reuters reported. Government agencies will now begin to hack a total of $85 billion from their budgets between Saturday and October 1.
"On the demand side, spending cuts suggest that the oil demand growth story for this year might not be as strong as everyone is expecting," Tom Price, global commodity analyst for UBS in Sydney told CNBC Asia's "Squawk Box" on Monday.
The International Monetary Fund spokesman William Murray said last week the IMF would likely shave the 2013 U.S. growth forecast by at least 0.5 percentage point if the cuts are fully implemented. The IMF is currently projecting the U.S. economy will expand 2 percent this year.
(Read More: Even Brief Spending Cuts Could Hit US Economy Hard)
A little over half of this week's respondents - four out of seven - expect prices to fall this week while the remainder believe prices are due for a corrective bounce since markets fell too far and too quickly last week.
Mark Waggoner of Excel Futures said Friday's session low on U.S. crude just above $90 may mark the bottom for the market though wasn't ruling out a further drop to $89 before prices staged a recovery.
David Kotok, chairman and chief investment officer at Cumberland Advisors predicted "lower near-term price action" though "once sequestration, debt limits and euro zone weakness clarify," oil markets may recover.