Mideast Crisis May Trump Macro Risks in Oil Market 'Tug of War'
Benchmark oil prices will likely gain this week as continued turmoil in the Middle East outweighs global growth concerns, CNBC's latest survey of oil market sentiment showed.
Exactly half of the survey group, or five out of ten respondents, say prices will rise. Three forecast declines while two expect prices to remain unchanged. Syria's civil war has spilled over its borders to sweep up neighboring Turkey and present the latest upside risk for the oil market in a broader series of Middle East flashpoints, which many believe have created a strong base in U.S. crude futures at around $90 a barrel.
"Oil is strategically headed higher, " said David Kotok, chairman & chief investment officer at Cumberland Advisors, who helps manage assets totaling about $2.1 billion, and has a bullish recommendation on oil. "Geopolitical risk in the 'oil patch' is rising. We disagree with the market's celebration based on passive regime change in Iran and calm transition in Venezuela. We see turmoil spreading in Nigeria. The activity on the Turkish-Syrian border is not about to cease."
U.S. crude futures jumped 2 percent on Thursday to nearly $93 a barrel intraday after unconfirmed rumors of a pipeline explosion resulting from the escalating conflict between Turkey and Syria roiled the market, the Wall Street Journal reported.
Although neither country is a major oil producer, Turkey is home to several major oil pipelines that transport crude from Iraq and Azerbaijan, the Journal said. The Turkish port of Ceyhan is the terminus for both the Baku-Tbilisi-Ceyhan Pipeline, which transports up to 1.2 million barrels a day of Azeri crude, and the Kirkuk-Ceyhan pipeline, which carries up to 1.65 million barrels a day of Iraqi crude, according to the U.S. Energy Information Administration.
"We continue to look towards the tensions in Syrian and Turkey for building a floor in the oil price despite our still medium term bearish outlook, " wrote Andrew Su, CEO of Compass Global Markets, in a daily market report published Friday. "A fall in tension should see the price retreat quickly but these things tend to get drawn out." Su has a 'neutral' recommendation on oil for the short term but is medium-term 'bearish'.
(Read More: Iraq Poised to Become World's Largest Oil Exporter: IEA )
"Volatility has been high and the ranges wide, " said Jonathan Barratt, chief executive officer of Barratt's Bulletin. "Traders are divided on the direction for the commodity and appear to be equally divided amongst those that believe tensions in the Middle East will prevail and those that feel the consequences of continued economic slowdown will see builds in inventories being the rule rather than the exception."
Swing producer Saudi Arabia has assured markets that it has spare capacity and will continue to pump crude at a 30-year high. Still, "supply security is the key for stability for the region and the price of the commodity, " Barratt said.
Middle East tensions and cargo loading delays in North Sea oil is causing the price spread between the Brent and U.S. crude contracts to "once again blow out, " Barratt noted. The spread is currently trading at around $23 a barrel, the widest in a year.
"We are currently long at $92.13 and happy to hold for the time being, " Barratt said. "Although economic growth concerns weigh on sentiment towards our position, we remain positive that Middle Eastern concerns will over rule. We have stops in at $87.70."
Gains may be capped this week if economic data suggests any deterioration in the already slower than expect global recovery. The International Monetary Fund (IMF) last week set the tone after cutting its global growth forecast for the second time since April and warned United States and European policymakers that failure to fix their economic ills would prolong the slump.
For this year, the IMF now expects global output to grow by 3.3 percent, down from its July estimate of 3.5 percent, making it the slowest year of growth since 2009. It predicted only a modest pickup next year to 3.6 percent, below its July estimate of 3.9 percent.
China data releases this week will be crucial in setting the tone for commodity markets. Inflation numbers are due on Monday and third-quarter growth figures will be released Thursday. Oil may rally if the data suggest the stimulus programs announced this year are supporting activity and helping the broader economy find a floor.
Expect "increased volatility" in oil markets this week, said Jason Hughes, head of Premium Client Management at IG Markets, though the softer fundamental picture "will win through and we will see Nymex sub-$90." Sixty seven percent of IG markets' clients are holding long positions, or bets on higher prices, on Nymex crude while 33 percent are long Brent crude.
Kirk Howell, Partner at Spy Ridge Capital, recommended a 'neutral' position in crude oil this week but said he'd resume a prior bearish stance if U.S. crude breaks below $90 or "would be looking to the upside if the price could break $93."
Turmoil in the Middle East "will continue to serve as support and a wild card for daily volatility with any new rumor, " Howell added. "Towards the end of the week and into next week, we think it's likely that Europe will retake center-stage for both the equity and commodities markets. As usual these days, the market is struggling to discount a number of potential catalysts and the choppy volatility is likely to continue."
On a more micro level, further upside risk may come from tightness in refined products, which could in turn lead the oil complex higher, survey respondents said.
U.S. distillate inventories in the week that ended Oct. 5 posted a fourth straight draw to stand more than a third below last year's level, government data showed Thursday. U.S. distillate stocks, which include diesel and heating oil, fell by 3.2 million barrels in the week to 120.9 million barrels, the Energy Information Administration reported, far more than analysts' average forecast for a decline of 500, 000 barrels.
Total U.S. distillate inventories are now 33 percent below the level of last October as refinery closures and higher exports have cut into domestic supplies, Reuters reported. Nymex heating oil futures hit a seven-month high of $3.2668 a gallon in the immediate aftermath of the report, before easing slightly.
For the rest of the quarter, the risk of severe winter weather in the northern hemisphere may rank as a bullish theme for prices, a threat compounded by the tight stock levels.
Even if diesel and heating oil prices remain relatively stable in the U.S. Northeast — the main demand center for heating fuel — colder weather alone could add $400 to the average homeowner's heating oil bill this winter, the U.S. Energy Information Administration's Winter Fuels Outlook said on Wednesday.
"What happens if we add a weather shock to the geopolitical outcomes? Then our case gets even more bullish, " Cumberland Advisors' Kotok said.
—By CNBC's Sri Jegarajah