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China Stimulus May Limit Oil's Losses This Week: Survey

Benchmark crude oil prices will extend losses this week as risk aversion stoked by lingering political uncertainty in Europe continues to haunt markets, CNBC's weekly survey of market sentiment showed.

Oil Rig
Oil Rig

About 45 percent, or five out of 11 respondents, polled in a weekly CNBC poll of analysts and traders, expect oil prices to fall this week. Three respondents believe prices will be unchanged while three forecast a gain.

Though Europe will continue to provide the negative overlay, a weekend move by China’s central bank to cut banks’ reserve requirement ratio (RRR) for the third time in six months may prove supportive.

Meanwhile, closely watched U.S. economic indicators including housing starts, retail sales and industrial output for April will also set the tone but more importantly Wednesday’s Fed minutes from its last meeting in late April will be scrutinized for any clues suggesting more stimulus may be on the cards.

China’s central bank cut the amount of cash that banks must hold as reserves on Saturday, freeing an estimated 400 billion yuan ($63.5 billion) for lending to head-off the risk of the sudden economic slowdown.

The latest easing move could mark the “turning point for more easing with more conviction,” Chi Lo, CEO of HFT Investment Management told CNBC Asia's "The Call"today.

After a largely positive start, most Asian stock markets are turning negative after the cut in banks’ reserve requirements in China. Risk assets including the Australian dollar – which is nearing parity with its U.S. counterpart – are looking vulnerable. Crude oil is losing ground with U.S. futures down 66 cents at $95.47/barrel on Globex while ICE Brent is 43 cents lower at $111.83.

Outside China, political uncertainty in Europe will continue to raise risk aversion. The euro hit its lowest level in nearly four months on Monday after Greek political leaders failed in their latest efforts to form a ruling coalition, keeping investors on edge over the risk of the country exiting the euro zone.

“The best vantage point to have read the market moves would have been a deckchair outside the Greek Presidential residence,” said one commodities trader, wryly describing last week’s price action.

The euro breached an option barrier at $1.2900 and dipped to as low as $1.28811 at one point on trading platform EBS, its lowest level since January 23.

“There is more downside, as the concerns over the euro zone only increase,” said John Kilduff, a partner at Again Capital LLC. “U.S. dollar strengthening will pressure commodity prices lower in general.”

‘Bearish Signals’

U.S. crude futures may continue their decline towards $90 a barrel area this week while Brent crude may breach $110, according to some technical analysts.

“The consistency of bearish signals in commodities, and even gold, is striking and we prefer to stick with the recent moves lower,” said Dhiren Sarin, Barclays Capital’s Chief Technical Strategist for Asia-Pacific.

U.S. crude futures will likely to push to “new lows for the year,” possibly testing the December lows around $92.55, Sarin forecast, while Brent crude could test $108. “Thereafter, a very important level comes into sight near $108, a trend line which has cleanly supported the uptrend for the past three years.”

Crude oil and risk assets broadly suffered last week after China’s industrial output numbers disappointed and Greece’s anti-austerity parties failed to form a coalition government, raising fears that the country was heading towards another election.

June crude futures on the New York Mercantile Exchange, settled 95 cents lower at $96.13 a barrel on Friday, generating the second straight week of losses. For the week, front-month crude fell $2.36 or 2.4 percent. In the last two weeks, U.S. front-month crude dropped $8.80, or 8.4 percent, the biggest two-week percentage loss since Sept. 30, 2011.

Crude oil quoted in London fared no better. ICE June Brent crude settling 42 cents lower, or 0.42 percent, at $112.26 a barrel on Friday. Brent crude also suffered its second consecutive week of losses, during which it dropped $7.57, or 6.3 percent, its biggest two-week percentage loss since Dec. 16, 2011.

Some respondents in this week’s survey argue last week’s selloff was overdone and prices may stage a technical rebound. “We are probably due for a slight retracement (higher) but the trend remains down,” said Kirk Howell, Chief Operating Officer of SunGard's energy and commodities business SunGard Kiodex.

Tom Weber at Portfolio Managers Commodity Futures & Options in Los Angeles expects this week will be “grim” for oil “if one was long” the markets though he characterized the move lower as a correction in a longer term uptrend.

“Commodities appear to be in a general downtrend for now,” he said. “Nevertheless, global growth appears to be slowing relative to last quarter’s expectations. We’ll continue to be short oil for now.”

Weber also noted supply risks from Iran “appears to be toned down.” Nevertheless, market bulls say talks scheduled May 23 between Iranand the western powers aimed at curbing Tehran’s nuclear program will be a key date for oil markets and could pose an upside risk. Saudi Arabia, the world’s largest oil exporter, meanwhile wants to keep prices at around $100 a barrel for Brent crude, a level Oil Minister Ali al-Naimi described as “great.”

Naimi said last week that producers were pumping enough to deal with the impact of the widening western sanctions against Iran on the oil market. He reiterated on Sunday that producers were pumping 1.3 million barrels per day to 1.5 million barrels above demand, which is helping to build inventory. “That should give comfort to consumers,” he said.

Ballooning U.S. oil inventories will continue to keep a lid on prices. Government data last week showed crude stockpiles rose 3.7 million barrels. Analysts had expected a smaller build of 2 million barrels. Oil inventories are now at their highest level since 1990, amid still-weak demand and steadily rising production.

By CNBC's Sri Jegarajah

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