Oil Prices Seen Weaker as US Jobs Data Loom
Benchmark crude oil futures will likely extend last week's near 2 percent decline reflecting a patchy global recovery, growing fuel inventories and slack demand, CNBC's weekly oil sentiment survey showed.
U.S. economic releases – particularly 'Tier One' data like the official jobs report – are taking on heightened prominence as global investors try to decipher when the Federal Reserve will start winding down its bond-purchasing program. Economists expect that rose 165 thousand in May, matching April's number, and that the unemployment rate stayed flat at 7.5 percent.
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"On Brent, we are bearish," said Dhiren Sarin, Chief Technical Strategist for Asia-Pac at Barclays Capital. "The payroll number will be important for risk sentiment though the current setup in Brent argues for selling rallies within range -- the range being $100 to $105 broadly speaking. It would take a close above $105 to rethink this outlook and allow for further bullish price movement."
Given the market's preoccupation with Fed 'tapering', a sub-par jobs number may be a positive factor for risk assets because it may mean the U.S. central bank will push out the time-frame for rolling back the stimulus. Conversely, upbeat data may be interpreted negatively by markets as it raises fears stimulus will be withdrawn earlier than anticipated.
Either way, this week's U.S. data – which also includes Manufacturing PMI and the ISM Manufacturing Index – will move the oil market while factory output from the euro zone together with monetary policy decisions from the European Central Bank and Bank of England will add to what promises to be another volatile week.
Last week's CNBC oil survey predicted Brent crude may break below the triple-digit mark. Our call came close but $100 held out last week and the century mark proved a tough support level to break.
Brent crude oil futures settled down $1.80, or 1.76 percent, at $100.39 per barrel on Friday. The market remained resilient last week to global stock market volatility, underwhelming economic data and reports of well-stocked fuel inventories. For the month of May Brent crude was down 1.93 percent compared to April.
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U.S. crude oil futures on Friday fell 1.75 percent, or $1.64, to settle at $91.97 per barrel, settling below the 200-day moving average for the first time in a month, Reuters reported. For the months of May, U.S. crude futures were down 1.6 percent from April.
"Short positions," or bets that prices will fall, "put on two weeks ago are making money," said Tom Weber, Portfolio Managers, Inc.
Selling is set to continue this week, according to CNBC's weekly poll of oil analysts, traders and strategists. Out of 13 respondents, eight (or nearly 62 percent) say prices will fall, three (23 percent) say prices will rise while two (23 percent) expects little change.
"I expect WTI (West Texas Intermediate, the crude oil grade underlying U.S. futures) will fall along with dollar strength," said Mark Waggoner of Excel Futures, who correctly predicted Brent crude breach $100 this week. The benchmark for more than half the world's oil hit a session low on Monday in Asia at $99.75 a barrel.
Meanwhile, Friday's decision by the Organization of Petroleum Exporting Countries to maintain its official output ceiling at 30 million barrels a day was "widely anticipated and had little bearing on prices," ANZ analysts said in a note on Monday.
"The markets are recognizing OPEC's inability to maintain pricing power in the face of perceived oil production increases in the U.S.," said Karim Rahemtulla, Chief Investment Strategist at Oil & Energy Daily. "As for the Middle East, none of the events over the past two years since the coup in Egypt have had any sustained impact on prices to the upside…you don't really have a strong fundamental reason for oil to move higher."
Technical traders, however, see some reason for a short term bounce in oil prices. "In the February through April period, oil (both WTI and Brent) completed a three wave correction lower," noted Sean Hyman, Editor of financial newsletter The Ultimate Wealth Report. "Now we should be in a 3-5 wave advance higher overall. So I'm bullish."
Hyman also said U.S. crude futures were trading above the "zero line" on the moving average convergence/divergence (MACD) indicator. "It's also trading above its 200-day simple moving average...all bullish signs," he added.
Official data over the weekend from China showing a surprise rebound in the manufacturing sector for the world's second-largest economy failed to offer much support for oil markets.
The May Purchasing Manager's Index, published Saturday, rose to 50.8 from 50.6 just one month earlier. A reading above 50 shows the sector is expanding rather than contracting and the result was well above most economists' forecast of 50.
However, data from private forecasters HSBC and Markit showed China's factory activity shrank for the first time in seven months in May as both domestic and external demand softened, while growth in the services sector cooled, pointing to slowing momentum in the world's second-largest economy.
The final reading HSBC/Markit Purchasing Managers' Index (PMI) for May fell to 49.2, the lowest level since October 2012 and down from April's final reading of 50.4. The figure was slightly lower than a preliminary reading of 49.6 released on May 23. Fifty divides expansion from contraction compared with the month before.
"The downward revision of the final HSBC China Manufacturing PMI suggests a marginal weakening of manufacturing activities towards the end of May, thanks to deteriorating domestic demand conditions," said Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC.