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Oil May Retreat as Markets Question Fundamentals: Survey

Oil prices may pullback this week as investors question whether levels over $80 a barrel are consistent with the fundamentals, a CNBC poll of traders and analysts showed.

CNBC.com

Last week, Nymex crude futures for November delivery rose $1.08 a barrel, or 1.32 percent, settling Friday at $82.66/bbl. Those gains are unlikely to hold this week, according to CNBC’s weekly survey. That’s despite calls for further U.S. dollar debasement on expectations that more monetary easing is on the way from the Federal Reserve.

Five out of 11 respondents (about 45 percent) forecast price declines, four (around 36 percent) expect the market to remain unchanged while just two (about 18 percent) believe prices will rise. Any upside risk will come from a falling dollar and further evidence in this week’s U.S. inflation data or Tuesday’s Fed minutes that may build the case for further monetary accommodation.

The commodity complex and U.S. equities rallied on Friday despite eagerly anticipated Non-Farm Payrolls declining by 95,000 in September and the unemployment rate remaining unchanged at 9.6 percent from August. Closely-watched private-sector payroll employment rose by 64,000, below expectations.

“For the time being, this is a topsy-turvy market: bad economic news is bullish for oil, because it reinforces the case for QE2; conversely, good economic news is bearish, because it raises doubts about the timing and size of QE2,” wrote Societe Generale analysts Michael Wittner and Stephanie Aymes. “That said, the fact that this key report did not cause prices to regain their mid-week highs tells us that QE2 appears to be mainly priced in already.”

Mark Waggoner at Excel Futures predicts markets will re-focus on the fundamentals this week and expects “a downturn below $80” as supplies continue to build and demand remains constrained.

Societe Generale note that the key dynamic is currently refinery maintenance season in the U.S. and Europe: “For the next few weeks, crude demand should be weak, crude stocks should build, and product stocks should draw.”

Tom Weber, Managing Director at Los Angeles-based Peregrine Financial Group has a neutral to bearish call on oil market. “I closed all long positions today and reversed to short side on the break today,” Weber wrote in an email on Friday. “I expect to see $80 before $85.”

Minority View

The two bulls in the survey form the minority view and expect oil to rise this week as views build in the market for the U.S. dollar to weaken. A pullback in the U.S. dollar makes dollar-denominated commodities like oil cheaper for importers paying in non-dollar currencies like Euros, Sterling or Yen.

“Oil’s going higher,” said David Kotok, CNBC Contributor and CIO of Cumberland Advisors. “Maybe much higher on weaker USD.”

Gavin Wendt, Founding Director and Senior Resource Analyst at MineLife Pty Ltd. agrees: “ Oil will continue to follow the same direction as gold, with a weaker dollar making commodities more attractive. There is a nice floor in place with respect to oil at present which should also help prices stay reasonably firm.”

Bolstering the bull case further -- evidence that the hedge funds are adding to bets that prices will gain. Net long crude oil positions on the New York Mercantile Exchange jumped to more than 165,000 in the week to Oct. 5, the highest since April, the Commodity Futures Trading Commission said on Friday, from about 107,000 a week earlier.

OPEC’s Meets In Vienna

Markets participants will be watching headlines from the Organization of Petroleum Exporting Countries’ ministerial meeting in Vienna on Thursday. The consensus view is that OPEC is unlikely to change oil output targets, delegates told Reuters on Sunday, while Qatar said current oil prices posed no harm to the global economy.

“Since the March OPEC meeting, it has been clear that the producer group is in no hurry to cap prices if they are driven higher by stronger world economic growth,” JP Morgan oil analysts led by Lawrence Eagles said late last month.

In fact, OPEC are largely comfortable with where prices have been for the large part of this year — within a range of $70 to $80 a barrel. OPEC argues that these ranges are sufficiently high enough for producers who need to invest and low enough not to undermine the global economy.

In a possible signal reflecting its stance at this week’s meeting, de facto OPEC leader Saudi Arabia, OPEC's top crude exporter, will supply full contracted volumes of crude oil in November to at least five term buyers in northeast Asia, steady with October levels, Reuters reported, citing traders on Monday.

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