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US Oil May Retest $100 as 'Stimulus Drums' Beat Louder: Survey

Sri Jegarajah|Reporter, CNBC Asia Pacific
Sunday, 29 Jul 2012 | 10:16 PM ET

Oil prices will likely gain this week on expectations that the U.S. Federal Reserve may announce additional stimulus to help boost an anemic recovery in the world's largest economy while markets are looking towards the European Central Bank to suppress unsustainably high sovereign borrowing costs in Spain and Italy, according to CNBC's weekly survey of oil market sentiment.

Oil derricks in North Dakota pump oil from the Bakken Formation.
Rosanne Olson | The Image Bank | Getty Images
Oil derricks in North Dakota pump oil from the Bakken Formation.

The risk-on rally in global financial markets started on Thursday after ECB President Mario Draghi vowed that "within our mandate, the ECB is ready to do whatever it takes to preserve the euro," adding "believe me, it will be enough."

Commodities rose the most in over a week on Friday but growing hopes for further global stimulus came too late to prevent the sector's first weekly decline in over a month, Reuters reported. Oil rose for a fourth day, gold neared its highest since early May and copper rose more than 1 percent. U.S. stocks climbed 2 percent.

Brent September crude rose $1.21 to settle at $106.47 a barrel on Friday but recorded a 36-cent loss for the week after four straight weekly gains.

Front-month crude-oil futures at the New York Mercantile Exchange settled at $90.13 a barrel on Friday, up 74 cents, or 0.8 percent.

"Fundamentally (prices) should fall but the stimulus drums are beating," said Phil Flynn, Senior Energy Analyst for The PRICE Futures Group. Tom Weber at Portfolio Managers, Inc. Commodity Futures & Options in Los Angeles said he was looking for U.S. crude futures to retest the "$100 area" this week. "Happy talk from Europe and the equity market's wishful desire for a Fed commitment to QE will shift the investment tides to rising and shall lift all boats accordingly."

Five out of 12 respondents, or about 42 percent, expect oil prices to rise this week; four expect prices to fall while the remaining three believe prices will remain around current levels, CNBC's weekly survey of oil market sentiment shows.

IG Markets strategist Justin Harper in Singapore said expect the usual "QE3 buzz" to boost energy markets ahead of the Fed's two-day FOMC meeting starting on Tuesday while the ECB's Thursday meeting "may keep the stimulus bulls happy for another 24 hours."

IG Markets' clients across the group are fairly bullish on oil, with 69 percent currently holding long positions, or bets that prices may rise, Harper said though added that any stimulus-led bounce may be blunted by the end of the week if the July U.S. non-farm payrolls figures out on Friday print below forecasts. Consensus forecasts suggest the U.S. economy created 100,000 new jobs in July.

Irrational Exuberance?

To be sure, markets should brace for a reversal should central bank action fall short of expectation and investors re-focus on the softer macro-economic background and the lingering threat that Greece may exit the euro zone.

Andrew Su, CEO of Sydney-based commodities trading and advisory firm Compass Global Markets said "the irrational exuberance" seen late last week should subside and U.S. crude could ease towards $88.

"Fundamentally, inventory figures, production rates and product demand all continue to point to lower prices. We are completely comfortable with our new core short positions established at $88 this week" Su wrote in a report published on Friday. "Given that our previous core shorts from above $102 were exited in profit below $80, we have the luxury of monitoring our latest core positions with a greater leeway whilst we target an end of September price of $76.50."

Warren Gilman, Chairman and CEO of CEF Holdings in Hong Kong suggested Brent crude's move well-above the century mark was overdone.

"I am frankly stunned that Brent is trading over $100 given the global economic headwinds and the bad news that will in all likelihood emanate from the troika meetings in Greece over the next couple of days," Gilman said.

Still, Gilman cautioned that there are upside risks. "There is always a risk of Iran saber rattling in the coming week which could have a short term impact but my bet is on the downside for the week given its relatively lofty level currently."

"The floor for the oil market will be set by geopolitical risks, particularly in Syria and Iran," wrote Michael Wittner, Head of Oil Market Research at Societe Generale in a report on July 25.

An "endgame" in the Syrian crisis raises the threat of "extreme instability" in the country, Wittner noted.

"It can easily spread to Lebanon and even Iraq, if Sunni elements backed by Saudi Arabia, Qatar, and Turkey decide to take on Iran's Shiite allies there. Regardless, if Assad falls in Syria, Iran will feel isolated without its only state ally in the region," he said.

From a technical perspective, Daryl Guppy, CEO of Guppytraders.com said the charts suggested a bullish tone with U.S. crude possibly testing resistance close to $98 to $100.

Meanwhile, Dhiren Sarin, Chief Technical strategist for Asia-Pac at Barclays Capital said there was a 'neutral' overall for energy prices but saw "modest upside risk" for Bent crude within a range of between $101 and $108.

—By CNBC's Sri Jegarajah

Follow Sri Jegarajah on Twitter: @cnbcSri

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