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Oil Prices to Extend Rally as US Earnings, China Data Set Tone: Survey

Sri Jegarajah|Reporter, CNBC Asia Pacific
Sunday, 10 Apr 2011 | 11:45 PM ET

Oil prices are poised to extend gains this week though any rally may be capped by inflation data from China which may build the case for more tightening measures from the world’s second-largest economy, CNBC's weekly survey of market sentiment showed.

Quarterly GDP numbers, March inflation data and fixed-asset investment from China this Friday will be a key driver for oil and the broader commodity markets. The data may be short-term negative for oil should inflation come in above 5 percent. That will mark the third month inflation exceeded the government’s 4 percent target.

Beijing may authorize further hikes in the reserve requirement ratio, official interest rates or use the currency to tame inflation and cool the broader economy to more sustainable levels of growth. Policy action may reduce the country’s appetite for copper to crude oil.

Meanwhile, Dow component Alcoa — the top aluminum producer in the U.S. — releases quarterly numbers on Monday marking the unofficial start to the earnings season. Oil markets will be watching the large retailers for any indication that consumer demand may be flagging because of surging gasoline prices. The outlook commentary by the large integrated oil majors such as Exxon Mobil will also be scrutinized.

A CNBC poll of analysts and traders expects prices to end this week higher overall. Six out of ten respondents expect oil prices to rise, two forecast a correction lower while the remainder believe prices will remain unchanged. The poll correctly predicted the direction of prices last week.

On the New York Mercantile Exchange, crude futures for May delivery settled at $112.79 a barrel on Friday, the highest price since Sept. 22, 2008, when front-month prices closed at $120.92. For the week, front-month futures rose $4.32, or 3.98 percent, up for the third straight week. ICE Brent crude futures in London rose $7.95, or 6.7 percent, extending gains to the fourth consecutive week.

‘Technical Sell-Off’

Serene Lim, Oil Analyst at ANZ expects a “technical sell-off” this week though “longer term support is still in place from the popular uprisings in Libya, Yemen and Syria as well as supply-risk concerns over delayed Nigerian elections.” Better-than-expected corporate earnings in the U.S. “may provide price floor to oil prices,” she added.

Oil prices remained elevated last week despite news from Libya that the country’s largest oil field was not damaged during attacks by government loyalists last week. The Sarir field could resume pumping once the area is secure, an oil executive in the rebel-held east said on Sunday, Reuters reported.

“In our view, the military situation in Libya threatens to devolve into a protracted stalemate with a growing potential for damage to oil facilities,” Adam Sieminski, chief energy economist with Deutsche Bank.

Libya’s daily production has fallen to between 250,000 and 300,000 barrels, a fraction of what they were pumping before the conflict of 1.6 million barrels.

“We believe Libya is out of the markets for the medium term,” Sieminski said. “Furthermore, we view underlying oil supply and demand fundamentals as tight given inventories are trending down and spare capacity is being squeezed. This portends a continuation of further advances in the oil price in our view.”

That said, ‘Libya fatigue’ is arguably fast setting in to some quarters of the market as many investors believe prices have well accounted for supply disruptions from Libya though perhaps not prolonged supply disruptions as Deutsche Bank’s Sieminski has pointed out.

Still, the key risk remains disruption from systemically important producers like Saudi Arabia, or additional producers in North Africa — possibly Algeria — witnessing large-scale popular uprisings that may disrupt the flow of oil and natural gas.

“Certainly Algeria is more important in terms of gas for Europe than Libya is for oil,” said Parag Khanna, Director of the Global Governance Initiative at the New America Foundation. “Still, right now Algeria looks ‘stable’ whereas Libya is anyone's game. Algeria is an underestimated gas powerhouse and even serious domestic unrest is likely to be on the streets (and across multiple cities) but not necessarily hurting gas exports. And at this point no doubt the key firms have taken precautions to protect against shock.”

De facto OPEC leader and swing producer Saudi Arabia “matters much more,” Khanna said, “but judging from their crackdown in the east against the Shi'a three weeks ago, it seems they have things in grip for the forseeable future. They have big challenges but they are making serious investments on wages, jobs and infrastructure.”

Dollar Weakness

Outside the geopolitics, the recent weakness in the U.S. dollar — which makes dollar-denominated oil cheaper for importers paying in yen, euros and sterling — should also buoy oil this week, poll respondents said. Fed policy is lagging its counterparts in raising rates and normalizing policy to pre-crisis levels.

“The Portugal bailout may have slowed the euro temporarily,” said Phil Flynn, a vice president at PFGBest. “Still with Europe raising rates and the Fed still printing money the dollar is looking weak in comparison.”

The dollar dropped 1.7 percent last week to $1.4483 against the euro as the European Central Bank boosted its benchmark rate on April 7 to 1.25 percent from 1 percent, and ECB President Jean-Claude Trichet signaled more increases may be on the way.

“The dollar remains historically weak and that is ongoing supportive” for oil prices, said Linda Rafield, Senior Oil Analyst at Platts.

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