Benchmark oil prices will continue sliding to fresh lows this week unless policymakers in Europe, China, and the U.S. “put a floor” under the market and do more to stabilize economic growth, according to CNBC's weekly survey of oil market sentiment.
U.S. nonfarm payrolls data on Friday showed the job market stumbling in May, with the world’s largest economy creating just 69,000 jobs and unemployment rising to 8.2 percent, sending a wave a renewed risk-aversion across the financial markets.
Oil markets were acutely affected: Brent crude futures dropped below $100 a barrel for the first time since October, while U.S. crude futures settled at $83.23 on Friday, the lowest close since Oct. 7. Both markets racked up their fifth weekly loss and extended declines on Monday.
Respondents in this week’s survey with a negative outlook for prices enjoyed only a slim majority, suggesting the selling of prior weeks may be starting to wind down.
“The markets need to breathe a bit; to consolidate and in WTI’s (the West Texas Intermediate, the U.S. crude futures contract) case to actually rally ... a bit,” said Dennis Gartman, the editor and publisher of The Gartman Letter.
“All eyes are Europe only. A mistake in my view,” said David Kotok, who manages more than $2 billion at Cumberland Advisors in Sarasota, Fla. “I'm still on the long side in oil stocks and see this as an opportunistic time to rebalance and take up weights.”
Many also view the price retreat as a buying opportunity: “We have been purchasing various longer-dated crude call spreads on value pullbacks, nothing too far out nor too close,” said Kevin Kerr of Kerr Trading International. “Here at these levels we may very well see a pullback, but not significant enough to turn me overly bearish.”
Still, five out of 13 respondents, just under 40 percent, expect prices to continue to fall this week. Four respondents believe oil prices will rebound, a marked turnaround from the sole bullish respondent in last week’s poll, while the remaining four expect prices will consolidate around current levels.
“Technically and fundamentally the trend for oil remains decidedly down, but I would watch for the ECB (European Central Bank ) on Wednesday and (Federal Reserve Chairman Ben Bernanke) on Thursday to do what they can to put in a short-term floor under the market,” Kirk Howell, chief operating officer of SunGard's Kiodex, who has a “neutral” call for this week. “I believe we’re likely to experience a choppy week of price action. Longer term, I still remain bearish.”
High global oil prices this year have limited the ECB's ability to cut rates below its record 1 percent level as it focuses on containing consumer inflation , Reuters reported. But concerns about a slowdown in the world economy have brought crude to below $100 a barrel. While only 11 of 73 economists polled by Reuters expect a rate cut this Thursday at the bank's monthly meeting in Frankfurt, investors will be listening carefully for any change in tone.
‘Critical’ Three Weeks Ahead
Meanwhile, Bernanke will be back on Capitol Hill on Thursday to testify before a congressional committee about the state of the U.S. economy.
“The U.S. dollar and the euro are the key drivers here,” said Kerr Trading’s Kerr. “Some Fed officials are rumbling for more money printing. I think that we are way too close to election time for any of that.”
Financial markets must contend with multiple policy and political risks this June, Kiodex’s Howell added.
“There’s absolutely nothing good to say about any of the data out at the end of last week,” he said. “U.S. jobs, Brazil (first quarter) growth, Chinese and U.K. (manufacturing data) all point to a significantly slowing global economy,” he said. “The next three weeks are critical for the global economy and, thus oil. The situations in Greece and Spain will likely both come to a head. The G5 plus Russia meet with Iran in Moscow and OPEC meets in Vienna June 14. Any market participants planning to take a holiday in June do so at their own peril.”
Upside risks for the oil market include the U.S. hurricane season, which some believe has been overlooked by many amid the preoccupation with Europe.
“We just had the first named storm down here in Florida, that's awfully early and if we get a wild hurricane season, look out,” Kerr of Kerr Trading said. “All that shut-in production, and all the delays and damage that come from an active season, and you have some real potential for price spikes.”
Meanwhile, risks from continued Middle East tensions focused on Iran’s nuclear program simmer in the background and may be a wild card for the market.
Israelis are evenly split on whether or not the government should attack Iran's nuclear facilities, a poll by the Netanya Academic College released Monday showed.
Fifty-two percent of those polled oppose a strike on the Islamic Republic, saying that Israel must pursue all possible diplomatic routes, while 48 percent were in favor of attacking. Eighteen percent believed Iran would try to annihilate Israel with a nuclear weapon, while 62.5 percent said Israel would be able to contend with an Iranian nuclear capability.
—By CNBC’s Sri Jegarajah