U.S. crude oil prices may test $90 a barrel this week as investors try to price in the risk of further flashpoints in the Middle East, while data from China suggests the world's second-largest economy is improving, according to CNBC's latest poll of oil market sentiment.
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Ten out of eleven of this week's CNBC survey respondents, or more than 90 percent, expect oil prices to climb, while just one believes oil will trade close to current levels around $88 a barrel.
Although the Gaza crisis is showing signs of de-escalating as a ceasefire between Israel and Hamas holds, oil markets are watching renewed domestic political tensions in Egypt and the implications for the continued flow of oil and petroleum products through the strategically-important Suez Canal and the Suez-Mediterranean Pipeline.
"You have to ask yourself, 'are you comfortable shorting oil here?' I wouldn't be. What if an oil pipeline is blown up, or Israel attacks Iran? That would be a nightmare for shorts," said Sean Hyman, a financial analyst who edits The Ultimate Wealth Report newsletter, referring to bets that oil prices will head lower.
"There's so much Middle East turmoil right now that could ignite into something much larger and oil could spike very easily from here," he added.
Egypt's ruling Islamists tried to defuse a political crisis on Monday, with President Mohamed Mursi backing a compromise over his seizure of extended powers last week, while his Muslim Brotherhood called off a planned demonstration, Reuters reported.
"If a political crisis erupts in Egypt, it could destabilize the rest of the region - just as it did in last year's revolution - and add to upside price risks," ANZ analysts led by Mark Pervan said in a note on Tuesday.
Separately, Egyptian mediators began talks on Monday with Hamas and Israel to flesh out details of a ceasefire agreed last week that ended eight days of fighting in the Gaza Strip.
"The longer the lull in Gaza, the higher the risk of a more significant fall below $85 and then towards our end of year $80-target," said Sydney-based Compass Global Markets in a report. "However, we maintain our neutral outlook in crude in the short term as there are various factors pulling the crude price in opposite directions."
Justin Harper, Market Strategist at IG Markets, said of the firm's clients currently trading oil, 87 per cent hold long positions, or bullish bets, an increase from 81 percent in the prior week. "They are very bullish right now," Harper said. "We have hundreds of clients trading oil on a daily basis so this is a good reflection of global sentiment."
China Recovers
Net-long positions in U.S. crude futures held by money managers rose by 5,564 contracts on the week to 188,018 futures and options combined as of Nov. 20, according to data from the Commodity Futures Trading Commission's Commitments of Traders report.
An improvement in the macro-economic picture from China is helping boost risk-taking in the oil markets, analysts said.
HSBC 's flash China manufacturing Purchasing Managers' Index released last week hit a thirteen-month high at 50.4 for November. This "confirms that the economic recovery continues to gain momentum towards the year end," said Qu Hongbin, HSBC's China Chief Economist. "However, it is still the early stage of recovery and global economic growth remains fragile."
Euro zone finance ministers and the International Monetary Fund meanwhile reached a deal late on Monday to lower Greece's debt, paving the way for the release of key aid to Athens and removing one pillar of uncertainty hanging over global financial markets.
Still, concerns about whether the U.S. can avoid looming tax hikes and spending cuts, referred to as the "fiscal cliff," was expected to remain in focus as U.S. lawmakers returned to Washington following last week's Thanksgiving holiday.
"The time for platitudes is over in Washington," said Kirk Howell, Partner at Spy Ridge Capital. He added that the week "will be crucial to see if real progress can be made on the fiscal cliff. It will undoubtedly be an interesting end to an interesting year."
—By CNBC's Sri Jegarajah