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‘Overextended’ Oil Market Conditions Seen: Survey

Benchmark oil prices may decline this week as many still consider market conditions are over-extended and current levels are not warranted by the supply and demand fundamentals, CNBC's weekly survey of market sentiment showed.

Mike Agliolo | Photo Researchers | Getty Images

Still, lingering fears of supply disruptions from the Middle East means investors may buy into any weakness, keeping prices well supported.

"We continue to look for a correction in the short term, though not a drastic one," said Dhiren Sarin, Chief Technical Strategist, Asia-Pac at Barclays Capital. "Choppy moves are likely ahead of basing signs in Brent (potentially above $120.00 or $120.50), as prices are stay largely range-bound."

Sarin said any pullback would be viewed as a "healthy unwind of overextended conditions and a setup for further gains." For this week, "we prefer to stay neutral or even modestly bearish given the corrective risks," Sarin added.

London Brent crude rose 54 cents to settle at $125.98 a barrel on Friday, posting a 1.88 percent weekly gain, the sixth weekly rise in seven weeks. U.S. light, sweet crude rose 82 cents to settle at $107.40 a barrel on Friday. For the week, U.S. crude rose 0.66 percent, after losing 2.8 percent last week.

Exactly half of those polled in a weekly CNBC poll of analysts and traders, or five out of ten respondents, expect oil prices to fall this week. Four believe prices will rise and one expects no change.

"Tactically, a correction would be a buying opportunity," said Mike Wittner, Managing Director and Head of Commodities Research, Americas at Societe Generale. "Iran is going to push prices up higher as we go through Q2 and Q3. As the Saudis increase to make up for lower Iranian exports, spare capacity will get very tight."

Shelley Goldberg, Director, Global Resources & Commodities Strategy at Roubini Global Economics said oil markets "still have room on the upside." Markets could benefit from follow-through buying this week after a solid February U.S. jobs report.

U.S. nonfarm payrolls exceeded expectations by rising 227,000 in February, the third straight month that gains topped 200,000. The unemployment rate held at a three-year low of 8.3 percent.

"Prices on Friday were supported by positive data out of the U.S., namely labor and service ISM indices — which had the effect of lessening impact of otherwise negative U.S. indicators such as weak capital goods orders and flat personal spending, construction and real estate, all in the face of an ongoing fiscal drag," Goldberg said.

The bulls in this week's survey said continued saber rattling between Iran and the West over Tehran's nuclear ambitions will continue to keep the market nervous. Still, prices eased sharply on Tuesday after the P5+1 group of countries comprising the United States, the U.K., France, Russia, China and Germany accepted an offer from Tehran for fresh talks on its nuclear program.

"Tuesday was the first taste of a pullback we've had in quite a while that was quickly erased in anticipation of resolution of the Greek PSI and Friday's U.S. jobs report," said Kirk Howell, Chief Operating Officer, of SunGard's energy and commodities business SunGard Kiodex.

Iranian President Mahmoud Ahmadinejad launched a fresh tirade against the West, saying the Islamic Republic does not fear military action, Iranian media reported on Sunday.

With little diplomatic progress despite numerous rounds of talks, Washington has refused to rule out military action and senior Israeli politicians have spoken of the possibility of air strikes, Reuters reported. President Barack Obama played down talk of war last week, however, saying there was a diplomatic "window of opportunity" and it was in everyone's interest for a peaceful solution to be found, Reuters said.

"While (Israeli Prime Minister) Netanyahu stated that Israel will not strike Iran in the coming weeks, the issue is still on the table at the Ministry of Defense, and the probability of military action will only accelerate if Iran refuses to back away from its nuclear build out," Roubini Global Economics' Goldberg said.

"Yet it is not just Iran we should be concerned with — Iran is part of a larger Middle East conundrum as blood is shed on the streets of Syria at the hands of Assad and political strife from Bahrain to Yemen to Iraq and beyond sees no signs of cooling," she added.

A key question for global financial markets this week is whether the Federal Reserve's Open Market Committee policy meeting keeps the door open to further stimulus measures for the U.S. economy.

Most analysts say it is unlikely the FOMC will announce new programs when it meets on Tuesday to decide monetary policy, the Wall Street Journal reported. The FOMC surprised markets during their January meeting by saying that rock-bottom interest rates would likely remain until late 2014, which sent the dollar reeling, the Journal said.

"The FOMC is unlikely to provide hope of additional stimulus," said SunGard's Howell.

Meanwhile, evidence of faltering economic activity in China could provide another reason for markets to sell cyclical commodities like oil in the short term. The world's second-largest economy recorded its deepest trade deficit since 1989 at $31.5 billion in February. China's consumer inflation rate last Friday was "tame" at 3.2 percent in February "but could also indicate a slightly more rapid slowdown than anticipated," noted Howell.

He added: "Speculative net longs are at 11-month highs while inventories are 8 percent above the average over the last 10 years in the U.S.. That leads me to believe, without a flare up in the Middle East, oil will likely pull back from $106.75 for WTI and $125.60 for Brent over the next week."

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