Oil to Extend Gains Despite Mixed Data
Benchmark oil prices are likely to extend last week's rally after payrolls numbers Friday showed modest improvement in the U.S. job market. However, weekend data suggesting China's economy could slow further in the current quarter may erode the gains, CNBC's weekly oil sentiment survey showed.
Brent crude settled up 95 cents on Friday at $104.56 a barrel, while U.S. oil prices gained $1.27 to close at $96.03 a barrel on news that the U.S. economy added 175,000 jobs last month, just above the median forecast in a Reuters poll.
Economists said the U.S. jobs number, though robust, wasn't strong enough to undermine the case for a faster withdrawal of stimulus by the Federal Reserve – a scenario which may have been perceived as a negative for risk assets.
"NFP (Non-Farm Payrolls) is fairly important in setting the stage for sentiment over the coming week or two," said Dhiren Sarin, chief technical strategist for Asia-Pacific at Barclays Capital. "Having broadly tested and held $100, the top end of the range is near $104.70/$105 now" for Brent crude, he said.
Sentiment appears to be shifting this week in favor of the oil bulls despite weak market fundamentals and a still uncertain macro-economic backdrop.
Brent last week posted a 4 percent gain – the strongest since July 2012 - while U.S. crude had its best weekly gain since April 26 at 4.5 percent. The price action was at odds with what most strategists, analysts and traders polled in last week's survey predicted.
(Read More: Oil Prices Seen Weaker as US Jobs Data Loom)
Still, Barclay's Sarin said a "decisive break" below either $100 or above $105 is needed to give clearer direction and "possible follow through for Brent."
Data released over the weekend from China, the world's second-largest economy, showed annual consumer inflation slowed in May while growth in bank lending fell below expectations –negative factors that may blunt any post-payrolls advance in oil prices when trading gets underway Monday.
Still, the majority of those polled in this week's survey expect buying to continue. Out of 12 respondents, exactly half say prices will gain, four say prices will fall and two expect little change.
Strategists point to at least three seasonal and geo-political factors that may drive oil prices higher in the near term –elections in Iran this Friday, unrest in Turkey and the U.S. hurricane season.
Benchmark crude oil prices may rise in the second half of this year if Saeed Jalili, Iran's chief nuclear negotiator and reported front runner in presidential elections, wins the vote scheduled for June 14 , analysts say.
The election in Iran – whose economy has been crushed by oil export-limiting sanctions – "could be a pivotal event for perceived risk, potentially pushing oil prices higher" in the second-half of this year and into the first half of 2014, said Alastair Newton, senior political analyst at Nomura.
(Read More: Oil to Gain If Hardliner Wins 'Pivotal' Iran Vote)
Meanwhile, an escalation in Turkey's most violent anti-government protests in years may complicate an already tense backdrop for energy security in the Middle East, possibly adding to the risk premium in benchmark oil prices.
Although Turkey produces only negligible quantities of oil and natural gas, the country represents an "energy crossroads" – Russian energy exports from the Black Sea port of Novorossiysk flow though the strategic Turkish Straits to markets in Europe and the U.S. Turkey is also an important conduit for oil transported via pipeline from northern Iraq.
(Read More: Turkey Adds to Complex 'Tapestry' of Oil Risks)
Finally, the 2013 Atlantic hurricane season could be "extremely active" and spawn 13 to 20 tropical storms, seven to 11 of which are expected to become hurricanes, the U.S. government's top climate agency predicted last month. The Gulf of Mexico accounts for about 20 percent of U.S. oil production.
Dominic Schnider, head of commodity research at UBS Wealth Management said the outcome of Iran's election, combined with a pickup in demand in the second-half of the year, possible supply disruptions in the Gulf of Mexico this hurricane season and broader Middle East geo-political concerns, could send Brent crude oil well-above triple-digits by the end of this year.
"The market is easily ripe for heading to $110" in the next six months, Schnider said.
Global oil markets will get a sense of the demand outlook in the coming week when three top forecasters release monthly reports -- the Organization of Petroleum Exporting Countries' (OPEC) Oil Market Report (OMR) on Tuesday and the U.S. Energy Information Administration's Short-Term Energy Outlook (STEO) on the same day. The International Energy Agency is issues its June Oil Market Report on Wednesday.
"Next week's forecasts from the three energy agencies will indicate what the mid-term prospects for oil demand are," Commerzbank's Carsten Fritsch said in a report on Friday. "We expect at least to see an end to the downward revisions."