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Bond rates, US data could guide oil lower this week

Monday, 26 Aug 2013 | 2:34 AM ET
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Benchmark oil markets may fall this week as higher bond yields erode confidence in the housing market, undermining the sector's 'multiplier effect' on the broader U.S. economy and complicating efforts by the Federal Reserve to withdraw stimulus.

Though consensus forecasts are calling for the Fed to start rolling back asset purchases at its mid-September meeting, recent negative data surprises suggest that time-frame may not be set in stone. U.S. crude futures rose 1.3 percent on Friday on expectations that the Fed would hold back from reducing stimulus after government data showed new-home sales fell by the most in more than three years.

A headwind for the housing recovery, higher U.S. mortgage rates have reflected a pick-up in benchmark 10-year Treasury yields which have traded at two-year peaks. "The last thing the Fed wants to do is prick the housing market," said John Licata, chief energy strategist and founder of Blue Phoenix in New York, who has a 'bearish' recommendation on oil markets this week.

(Read more: Why recent oil gain does not make an uptrend)

"For many, their home values rising have been reasons they have been spending more on retail," he said. "If the Fed tapers too much too soon, declining home prices plus lofty energy costs will make Q4 a miserable time for the stock market."

CNBC's weekly sentiment survey showed 54 percent, or thirteen out of 24 respondents, believe prices will fall this week. Over a quarter, or seven out of 24, say prices will gain while 17 percent (four out of 24) expect the market to trade at around current levels.

"World growth is tepid and risk rises with every basis point hike in world bond markets," said David Kotok, Chief Investment Officer at U.S. money manager Cumberland Advisors, with $2.3 billion assets under management.

Oil market volatility may be heightened this week as investors try to second-guess when stimulus taper may occur as traders scrutinize economic indicators for clues.

Scheduled U.S. data releases this week include July durable goods orders on Monday and the final reading for the Thomson Reuters/University of Michigan consumer sentiment index on Friday. But the highlight will likely be Thursday's latest estimate of U.S. gross domestic product for the second quarter. The data is expected to show the economy grew a revised 2.2 percent annualized rate last quarter compared with a 1.7 percent reading last month, according to economists' forecasts compiled by Reuters.

(Read more: Here's why Egypt-led oil rally may falter)

Trading action this week may mirror last week's volatile moves, said Kirk Howell, portfolio manager at Allston Holdings, LLC. Last week's strong U.S. manufacturing PMI data helped offset cautious Fed minutes, he said, adding that a deteriorating situation in the Middle East propelled WTI crude off $103.50 though U.S. crude was still down on the week at around $106.30.

"I wouldn't be too surprised if this week we see more of the same kind of choppiness given the added component of squaring the books for the end of month and starting to position ahead of what will be a very busy September" with the release of the official labor report September 6 and the Fed's policy meeting on September 18, Howell said.

A spike in oil prices just around the corner: Pro
Jonathan Barratt, founder of Barratt's Bulletin, says a spike in oil prices is imminent because of the Syrian crisis and the U.S. hurricane season.

No taper?

Opinion is split on how capital markets would react if the Fed defied expectations and voted not taper in September.

Some argue the availability of cheaper liquidity for longer may help fuel a relief rally in risk assets while others say it may be interpreted as a negative signal if the Fed believes the economic recovery is still fragile and needs support for longer. Commodity markets suffered a wave of selling in the second-quarter after the Fed first suggested it would scale back stimulus, depriving markets of a source of cheap liquidity. Some fear another bout of selling if the Fed tapers next month.

"Taper is bad but no taper indicates economy is weak," said Warren Gilman, Chairman and CEO of CEF Holdings, a resources-focused private equity investor. "So either way prices likely to come back down."

(Read more: Terror fears draw buyers of crude oil)

Outside the macro-economic focus, a sizable proportion of bullish survey respondents warned the conflict in Syria may represent an upside risk, lifting the risk premium in the oil barrel and adding to a choppy trading backdrop.

U.N. weapons experts are due on Monday to inspect a site where poison gas killed hundreds of people in Damascus suburbs, amid calls from Western capitals for military action to punish the world's worst apparent chemical weapons attack in 25 years, Reuters reported.

"Oil is getting impacted by Syria crisis now. The fear or risk is a foreign government gets involved," said a Bangalore, India-based proprietary oil trader. "Oil is a strict 'no short' for me. I look at it as a 'buy on dips' market. Having said that, I will not hold big positions overnight."

Adding to the tense supply background, Libya's navy prevented a tanker from "illegally entering" Al-Sedra oil terminal in the east of the country, the army's general staff said Tuesday, as protests paralyzed several ports. A Libyan navy patrol boat reportedly fired on the 340-meter supertanker to make it change course from Al-Sedra , where it was thought it would take on an unauthorized shipment of crude oil, the Saudi Gazette reported on its online edition on Sunday. A week ago, Prime Minister Ali Zidan warned that any suspect vessel entering Libyan waters would be fired on without warning, the Gazette said.

(Read more: Rising oil prices: Is it really all about Egypt?)

"The problems in Libya are escalating with the navy firing at an unauthorized tanker earlier in the week, and even though two small ports are said to have reopened, the problems there are far from over," said David Nevin, an energy broker at Xconnect Trading in London.

Israel's air force on Friday bombed a militant base in Lebanon used by allies of Syrian President Bashar al-Assad and radical Islamists in retaliation for a rare cross-border rocket salvo a day earlier, Israeli and Lebanese officials said, according to Reuters.

"Syria adds to the mix, and any intervention by the U.N. will upset the Iranians," Nevin added. "The geopolitics of the Middle East continues to support."

Brent crude "looks to be a 'buy on dips' market going forward," Nevin said, adding that a pull-back in Brent to around $108 and $107.70 represents an attractive buying opportunity; while, on the upside, a break past $111.20 may provide a springboard to the $111.70 area and possibly $112.23.

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