Oil to Rally on Europe, Earnings Optimism: Survey

Sri Jegarajah|Reporter, CNBC Asia Pacific

Benchmark crude oil prices will likely sustain their rally this week on optimism that European leaders can contain the debt crisis and recapitalize the region's ailing banks, CNBC's weekly survey showed.

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

Talk of possible OPEC supply cuts and robust third-quarter U.S. corporate earnings may also prove supportive. Exactly half of the week's sample group of 10 respondents said prices would climb this week. Four respondents in the survey predicted prices would fall and one expected prices would remain unchanged. 

"We believe that the split among OPEC nations with regards to supply cuts should cause some more uncertainty in the markets and that the vote to support the EFSF from the final two nations in the Eurozone on Monday and Tuesday should add to this renewed optimism of late," said Andre Julian Chief Financial Officer at OpVest - Option Investments, Inc. "Europe finally understands how important a well-conceived plan to address their debt crisis is to global market sentiment."

The euro rose the most in 15 months against the dollar on Monday and may extend gains after Germany and France pledged to deliver a plan to protect banks and the euro region from its worsening sovereign debt crisis, Reuters reported.

Traders will now focus on voting in Slovakia to ratify changes to the European Financial Stability Facility, a 440 billion euro bailout fund. That's the remaining euro zone country still to approve the changes. Any delay on passing the legislation could affect sentiment toward the euro.

"The obvious caveat is that any bad news from Europe can greatly alter sentiment, so we are protecting this week's gains and are always cautious moving forward in this environment," OpVest's Julian said.

Turning to supply, Saudi Arabia's oil minister Ali al-Naimi said over the weekend that OPEC's top exporter had cut production to 9.39 million barrels per day from 9.8 million bpd in August. But Naimi said he did not see a decline in the kingdom's exports as Libya restored production disrupted by civil war.

Bank of America Merrill Lynch's Francisco Blanch said a sustained drop in the price of Brent crude to around $85-$90 a barrel will "probably get OPEC into the meeting room" to talk collective supply cuts.

However, Peter Turville-Ince, Director of Compass Global Markets said the recent jump in oil prices made it less likely OPEC would intervene: "We do not believe that OPEC will take any measures to cut output in order to stabilize prices as the market will be able to take care of this itself."

Q3 Earnings

On the broader market outlook this week, Turville-Ince said: "We suspect that any further positive news out of the U.S. this week and a more solid plan out of Europe could see significant short covering and most of the bad news priced back out of the markets. 

He added: "It was clear to us that the bounce was so sharp because the markets were so short. This leaves room for a further rise this week as we see earnings results kick off in the U.S."

The start of the third-quarter U.S. earnings season his week will bring the correlation between the broader U.S. equities markets and the price of crude oil into sharper relief.

"Earnings season should add some more confidence as expectations look promising," OpVest's Julian said. "There continues to be a strong correlation between movement in the U.S. equity market, the MSCI index and the crude price."

Dhiren Sarin, Chief Technical Strategist, Asia-Pacific at Barclays Capital said he recommended a neutral/bullish bias for oil markets "while keeping an eye on equities as a gauge of risk sentiment" this week.

Many still doubt that the gains on the cyclical commodity markets will hold because the balance of negative headline risks out of Europe, the U.S. and even China are still tilted to the high side.

"Economic anemia will prevail," said Mark L. Waggoner at Excel Futures. U.S. crude futures may drop to $74.50, he added. Peter McGuire, CEO of FX Global Capital, expected a 7 percent drop for both Brent and U.S. crude futures by the end of the month.

Meanwhile, Societe Generale analysts Michael Wittner and Stephanie Aymes said the market has not reached "sort of a turning point or even a sentiment is notoriously fickle."

More fundamentally, they said too much damage has already been done to business and consumer confidence and this should feed through to the real economy. The French bank reiterated their forecasts for $98 Brent crude, and $73 for U.S. crude futures for the fourth-quarter of 2011 and the first-quarter of 2012.