Oil to Drop Below $100 Easing Pressure on OPEC to Up Output: Survey

Sri Jegarajah|Reporter, CNBC Asia Pacific

Benchmark crude oil prices may continue to drop below $100 a barrel, easing pressure on the Organization of Petroleum Exporting Countries to raise output at its meeting this Wednesday, CNBC's weekly survey showed.

Still, prices remain elevated and may mean higher fuel bills for U.S. consumers, slowing the recovery in the world's largest economy. Meanwhile, Asian stock markets rallied Monday on hopes that an agreement involving 17 nations that use the Euro currency to tighten budget discipline may help resolve the region's debt crisis.

However, many believe the "resolution euphoria" won't last, though others are more confident that it has laid the groundwork for a lasting solution. Andrew Economos, Head of Sovereign & Institutional Strategy Asia at JPMorgan, described the pace of progress towards a fiscal compact on Friday as "lightspeed...a breakthrough by European standards." This should generate a risk-on rally in the short term though he warned of a pullback in January or February as the markets refocused on recessionary fears.

On the flipside, Andrew Pease, Investment Strategist at Russell Investments noted this morning that Italian bond yields over 6.5 percent suggest Friday's EU leaders' summit, and their agreements on tighter budget oversight, has "done nothing fundamentally" to change the debt crisis.

On balance, most of this week's survey sample group agreed with Pease's assessment. Five, or exactly half, of the week's sample group of 10 respondents said prices would fall this week, four said they would rise while one said prices would remain unchanged.

"The crisis will not be gone by next week," said Excel Futures' Mark Waggoner on Friday. "Crude oil will not sustain these levels for long. Correction lower is inevitable."

But Peter Turville-Ince at Compass Global Markets maintained his bullish call on the basis of the progress he believed European leaders had made at last Friday's summit towards tighter fiscal discipline.

"Oil should benefit substantially from Friday's outcome as traders can now place less emphasis on Europe in the short-term and focus more on the positive news we are seeing in the U.S.," he said. "All the market needed was some sort of a framework or guide to what will be done and how we will achieve these outcomes and this is exactly what we got. There may be flaws in the plan but in the end this framework should act to restore some investor confidence and remove some of the uncertainty that has been present."

He added: "Economic data is improving in the U.S. and University of Michigan consumer sentiment data on Friday clearly showed that optimism is starting to return in the U.S. economy and if we see jobs data continue to improve as it has been of late we could see a very big end of year rally in equity markets which would push crude prices well over the $100 mark."

A move to the $105-$110 band by year-end was possible, Turville-Ince said, if concerns over an Iranian oil embargo escalate and as long as U.S. data continues to improve. "Any pullbacks have been very well supported and we feel that any dips below $100 are a great buying opportunity as long as support at $97.50 holds in the short-term."

Demand Destruction?

Crude oil's march back above $100 has yet to feed through to retail gasoline prices in the U.S. On average, prices for regular gasoline in the U.S. fell 8.89 cents to $3.2918 a gallon in the two-week period ended December 2, according to influential Lundberg Survey.

The International Energy Agency on Monday said a boost in Saudi oil production would provide "welcome" relief to rising oil prices, warning continuing price hikes threatened to thwart global economic recovery efforts.

"OECD stock levels are at historically low levels, plus we are in a very fragile economic recovery situation," IEA chief economist Fatih Birol told a seminar. "And the higher prices than we have now can strangle economic recovery efforts worldwide, therefore the Saudi production boost currently and in the future will be very welcome," he told a seminar.

A senior Saudi oil official told Reuters last week the kingdom produced 10.047 million barrels per day (bpd) of crude oil excluding condensate in November, the highest rate for decades.

From a technical perspective, Dhiren Sarin, Barclays Capital's Chief Technical Strategist - Asia-Pac, said prices could pull-back as investors remain reluctant to redeploy money back into risk assets.

"We expect choppy ranges to persist across markets as investors stay reluctant to put on risk," Sarin said. "For crude oil, this likely leads to a drift lower within range as WTI crude makes its way back towards the $94/95 area, continuing to unwind its overbought extremes seen at the November peak. Range highs near the $103.40/$104.60 area remain a difficult barrier to overcome for the time being."