Oil to Challenge 2010 Peaks This Week; OPEC in Focus

Oil prices may challenge 2010 peaks near $84 a barrel this week on expectations higher demand from China will likely offset weaker growth rates in developed economies, a CNBC poll of analysts and traders found.

Five out of 11 respondents, or 45 percent, expect gains this week, four forecast steady prices while two called for a decline. Last week, Nymex crude were little changed -- in line with CNBC’s previous poll -- falling 0.3 percent to settle at $81.24 a barrel on Friday.

"I am bullish on crude and products due to robust China demand, the U.S. economic recovery on the near horizon and fund investments in commodities," said Chris Mennis,
President of New Wave Energy LLC. "I would not be surprised by a breakout over the $83.95 high achieved last January 11."

Robust demand from China, the world’s second largest energy consumer after the U.S., has contributed to a near 80 percent rally in crude prices last year.

Data released last week from China’s National Bureau of Statistics continued to show strong demand despite recent measures from the central government to cool overheating sectors of the economy by limiting the availability of credit.

Amongst the standouts in the data, China's refinery crude throughput rose to a record high of 8.32 million barrels a day in February.

Meanwhile, statistics from the consumer nations energy watchdog International Energy Agency reinforced China’s demand picture: demand surged by an "astonishing" 28 percent in January compared with the same month a year earlier, the IEA said.

Emerging Versus Developed Markets

The IEA also noted that demand for oil this year would be underpinned by rising needs from emerging markets, with half of all growth coming from Asia. Meanwhile, demand in developed countries would fall by 0.3 percent, according to the IEA.

"Demand growth is still picking up in emerging markets but I think the pace of increase remains slower despite the fact that China and Brazil have become among the only bright spots for the global auto industry,” said Rachel Ziemba, Senior Research Analyst, China and Oil Exporting Economies at Roubini Global Economics.

“But underlying demand still seems weak - definitely in advanced economies where growth seems to be stalling in the face of ongoing deleveraging."

To be sure, investors said the February data raised expectations of further tightening measures from Beijing, possibly slowing the economy and hurting demand for commodities.

"The Chinese economic data…should prompt some monetary tightening in Q2 2010 rather than just the balancing we have seen in Q1," Ziemba added.

Aside from China, oil market participants are awaiting the Fed’s rate-setting meeting this Tuesday. The U.S. central bank’s assessment of the economy will also provide direction.

An upbeat economic outlook would support higher demand. Conversely, a strong assessment could send the U.S. dollar higher and undermine any price gains if the currency correlation remains tight. A stronger dollar makes dollar-denominated commodities more expensive for buyers paying in currencies like the euro or sterling.

Traders and analysts have repeatedly pointed out that they need to see concrete evidence in the data - particularly in the jobs market -- of the recovery gaining momentum for prices to stage any meaningful rally.

Demand Signals, Refiners

Meanwhile, demand signals have turned more favorable in recent weeks. Retail gasoline prices in the U.S. are approaching $3.00 a gallon and four-week average demand has recovered.

The focus is switching from distillates as winter ends in the northern hemisphere and turning to motor fuel with the onset of the summer driving season in the U.S. which traditionally lasts from the Memorial Day weekend in late May to Labor Day in early September.

The picture is also looking moderately better for the refining business. Last week Goldman Sachs raised their price targets on some of the listed names in the U.S. refining sector including Valero Energy and Tesoro .

The cracking margins for heating and gasoline have rebounded after the industry shuttered excess capacity. That process continues and remains controversial. Total SA’s planned closure of its Dunkirk plant has triggered protests and industrial action by French refinery workers.

Nevertheless, Societe Generale analysts remain cautious about the run-up in crack spreads and recommend selling into the rally.

"While the 2010 outlook for crude oil is moderately bullish, this is not the case for product crack spreads," Societe Generale said. "As was the case in 2009, the global refining sector is suffering from severe overcapacity. Therefore, margins should remain very low in 2010, and we recommend selling in spikes in cracks. Indeed, we are recommending selling the RBOB gasoline-WTI crack as we expect the ongoing surge to be short-lived."

OPEC Policy

OPEC’s Wednesday policy meeting will also set the tone this week. The broad consensus view suggests production will remain unchanged since OPEC appears content with prices between $70 and $80 a barrel.

"OPEC wants to keep oil below $80 so I do not expect any major price surge off their announcement," said Mike Sander at Sander Capital Advisors.

Mark Hansen at CPM Group added OPEC "might talk up demand a bit" after the producer-group raised global demand forecasts last week. Broadly, OPEC appear content with prices between $70 and $80 a barrel.

"We expect the outcome of the meeting will be an insistence on improved compliance with existing targets," said Peter McGuire, Managing Director at CWA Global Markets. "OPEC still sees the market in a state of oversupply. OPEC would certainly be satisfied at the current price at this early stage of the economic recovery."