Oil Heading Lower After ‘Black Thursday’
Benchmark oil prices are set to decline further this week after the U.S. Federal Reserve Chairman Ben Bernanke put markets on notice last Thursday that they will be weaned off the "easy-money" policies that have been so central to supporting risk assets such as commodities.
Dubbed "Black Thursday" by Commerzbank analysts, commodity markets suffered their biggest drop in a year and half, hit by bleak Chinese data and the Fed's plan to slow its bond-purchase program by the end of the year.
The 19-commodity Thomson Reuters-Jefferies CRB index sunk 2.5 percent on Thursday, its sharpest decline since December 2011. Gold bore the brunt of the Fed-induced sell-off with bullion hitting a two-and-a-half year low. U.S. crude oil sank 3 percent. That helped ease the threat of triple-digits, offering a degree of relief for consumers.
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Last week's survey highlighted the risk of $100 U.S. crude, but noted oil bulls needed a dovish Fed to take prices over the century mark. Furthermore, the critical level has proven a tough barrier to break and attempts to challenge the century mark had failed five times this year.
Despite fears of a liquidity crunch in China, the world's second-largest economy, U.S. crude rebounded on Monday by $1.49 after a three-day slide while Brent crude eased 25 cents to $100.91 a barrel. Lingering fears of supply disruptions driven by political tensions and conflict in the Middle East were limiting pronounced market weakness, according to some strategists.
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"The fundamentals certainly do argue for slightly lower prices, though not significantly lower prices," David McAlvany, CEO of McAlvany Financial Group told CNBC Asia's "Squawk Box" on Tuesday. Oil markets have been "relatively strong even with the OPEC continuation of ample supplies, so I would have to say it's got to be the fear premium" supporting prices."
"The issues in the Middle East keep people wanting long exposure there from an investment standpoint, and that's been extra support in an environment where, again, the supply and demand fundamentals are a little on the weak side," McAlvany added.
In terms of risk factors, strategists warned the jump in 10-year Treasury borrowing costs above the critical 2.50 percent mark on Friday, a near two year high, may be a negative cross-sector theme.
"This could very well turn into a summer of market discontent," said Tom Weber, senior commodity advisor at Portfolio Managers, Inc. Commodity Futures & Options in Los Angeles. "The question is: Are the bond vigilantes ready, willing and able to put the Fed to the test by pushing down prices, thereby raising yields?"
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Dhiren Sarin, chief technical strategist for Asia-Pacific at Barclays also highlighted the risk from higher rates in the U.S.: "The risk is the ongoing bond sell -off leads to profit taking in several other assets," said Sarin, who has a bearish recommendation for oil this week.
"Further, $100 tends to be a psychological hurdle for WTI and perhaps investors are tactically looking to go short against this level. However, we do not expect dramatic downside and would view weakness as a temporary correction."
A little over 60 percent of respondents (eight out of 13) expect prices to ease further this week, about a third, or four respondents forecast prices to climb while one says prices will consolidate around current levels, according to CNBC's poll.
Jonathan Barratt, the chief executive officer of Barratt's Bulletin, a commodity newsletter in Sydney said he established short positions, or bearish bets, on U.S. crude at $99.04. "We went short at what now is a great level," Barratt said.
Looking into next month, Mark Waggoner of Excel Futures said U.S. crude may drop to $84 as soon as Brent breaks $100.
U.S. data this week – durable goods, new home sales and home price data on Tuesday are amongst some of the key scheduled releases - will be closely-watched by markets to determine how soon stimulus may start to be withdrawn.
Unless the data "relight the lantern at the end of the tunnel," oil and the broader commodity complex is heading lower, Portfolio Managers' Weber said.