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Oil May Consolidate After Breaking Out of Range: Survey

Monday, 5 Apr 2010 | 11:25 PM ET

Benchmark oil prices may consolidate around $85 a barrel and could even push higher this week as optimism grows about the economic recovery which could boost fuel demand, CNBC's weekly market survey found.

Last week, CNBC’s poll correctly predicted that an upbeat U.S. employment report would contribute to a breakout from the current range-bound trading. U.S. crude futures on Thursday surged to a 17-month closing high of $84.87 after data from China, Europe and the U.S. showed manufacturing activity improve.

The positive run of data culminated with U.S. payrolls numbers on Friday, which showed the economy created 162,000 jobs in March -- the best gain in three years. Follow-through buying on Monday in reaction to the upbeat jobs report sent crude to a fresh high of $85.89.

Three out of six respondents forecast higher prices for the week beginning April 5, three forecast prices will be little changed while none expected losses, according to the poll for the week beginning April 5.

“The trend seems strong and the market seems to like the employment data,” said Roger Nusbaum, Chief Investment Officer at Your Source Financial, a financial planning firm in Phoenix, Arizona.

However, many observers believe $85 won’t hold as the price doesn’t reflect the fundamental reality of an oil market struggling to drain an inventory overhang.

Inventory data this week will be crucial in deciding whether prices pullback. Demand numbers will be scrutinized especially closely to see whether the consumer is baulking at $3 gasoline at the pump.

Jason Feer, Vice President and Singapore Bureau Chief of Argus Media is skeptical of the recent gains. The big question is whether demand will be strong enough to “soak up” excess production and refining capacity, Feer said.

“At these kinds of prices, you’ll start to see conservation and hard-hit consumers in the U.S. reducing their demand,” he adds. “People have gotten ahead of themselves in terms of the economic recovery.”

Ben Westmore, Economist for Australia & Commodities at the National Australia Bank, agrees that prices in mid-$80's are not “consistent with current fundamentals.’ Still, he doesn’t expect a “near-term price moderation, as data from the North Atlantic is depicting economies that are beginning to show sustainable, or non-stimulus fuelled, expansion.”

This suggests that the recent supportive data may be building a floor in the market around $70.

On the macroeconomic front, PMI manufacturing data from Europe will be closely watched by commodities market for evidence of the recovery gaining traction.

“PMI measures from Europe are important at the moment - especially the services component - and they will be worth keeping a close eye on in the weeks ahead,” Westmore said.

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