Greece Debt Drama Is Downside Risk to $100 Oil: Survey

Sri Jegarajah|Reporter, CNBC Asia Pacific

Oil prices will likely consolidate around $100 a barrel this week though any move higher will be capped by market uncertainty on what happens next in Greece. On Sunday night, Greek leaders passed new austerity measures crucial to receiving a second bailout package, but violence in Athens marred the vote.

about the 3.3 billion euro austerity bill, which involves deeply unpopular wage, pension and job cuts – the price exacted by Athens' international creditors in return for a 130 billion euro bailout, Greece's second in two years.

Investors were rightly cautious – euro zone finance ministers wanted firmer guarantees, more conditionality and more austerity - a further 325 million euros worth - before any new aid could be disbursed. Last Friday, the S&P 500 posted its biggest daily percentage decline thus far in 2012.

Oil markets, however, seemed to take  the headline volatility out of the euro zone largely in their stride. U.S. crude futures settled at $98.67 a barrel on Friday, falling $1.17, or 1.2 percent but rising 83 cents for the week.

Brent crude closed at $117.31 on Friday, down $1.28, or 1.08 percent, ending an eight-day winning streak. For the week though Brent outperformed U.S. crude to gain $2.73, or 2.4 percent while the transatlantic spread (Brent's premium against U.S. crude) stood at under $19 a barrel.

This week, consensus opinion in CNBC's oil sentiment survey suggests the market will continue to shrug off negative headlines from Europe though any upside move will be limited. Out of ten respondents, 60 percent expect prices to rise, twenty percent expect prices to fall and the remaining twenty percent are calling for prices to remain stable.

“It will be risk-on, risk-off dependent on Greece,” said Roger Nusbaum, Chief Investment Officer of Your Source Financial. “By next week, risk will be back on and it can go a little higher.”

Optimists argue that fallout from the euro zone debt crisis – particularly on the balance sheets of the region's banks – can be contained because of the European Central Bank's unprecedented liquidity measures.

“Risk is back on, for now, as the fat tail risks of a Greek exit and European bank defaults diminish and liquidity measures from (Long Term Refinancing Operation) to QE3 should support the energy markets,” said Shelley Goldberg, Director, Global Resources & Commodities Strategy at Roubini Global Economics.

Others are more cautious. Mark Waggoner of Excel Futures has a 'neutral/lower' call on the markets this week and expects U.S. crude futures to remain range bound between $96 and $101.50. “Dollar should start to rally once Europe problems seem solved,” Waggoner said. “This will put pressure on crude. Europe will have a resolution, but will come up short, once again. This should bring us back down to $96.”

Supply Threats

Away from Europe, global oil markets are weighing the risk of physical supply disruptions from key OPEC producers. Iran's parliamentary speaker Ali Larijani warned Iran will not forgive Gulf Arab nations if they continue backing US "plots" against Tehran, local media reported on Sunday, according to AFP.

RGE's Goldberg said Iran represents “the elephant in the room for crude oil with greater pressure on Brent, making $15-20 what appears to be the current new normal for Brent's premium to WTI.”

She added: “Current 30-day volatility in crude is trading just under 20 percent, while that of natural gas is three times the crude level.

Furthermore, both Brent and WTI were up until recently, trading in backwardation (a price structure in the futures market where contracts for immediate delivery rise above the future months, suggesting a tight supply-and-demand balance) but WTI has reverted to contango (when immediate delivery contract months fall below the forwards) as supplies remain plentiful and North American production continues to rise. Weather has also been a factor as the U.S. has had a relatively mild winter compared to a very cold Europe.”

Staying with potential supply threats, David Kotok, Chairman and Chief Investment Officer of Cumberland Advisors, warned “Nigeria holds the key to higher prices.”

Nigerians voted amid tight security in a governorship election on Saturday in President Goodluck Jonathan's restive and oil-rich home state of Bayelsa, where last week militants attacked a major oil pipeline.

Turning to the demand fundamentals, China last week released inflation numbers for January showing inflation was hotter than expected at 4.5 percent. Still, the inflation has been on a decelerating trend because of monetary policy tightening, giving policymakers some room to increase retail fuel prices last week.

China hiked fuel prices by as much as 4 percent last Wednesday, lifting pump prices back to the record seen before the last price cut on Oct 9, Reuters reported. The retail price of widely-used 93-ron gasoline in Beijing rose back to 7.85 yuan ($1.25) a litre, the highest across the country.

“The move should be welcomed by refiners and perhaps taken as a sign that this year the government may allow for more frequent price adjustments in line with crude prices, unlike last year,” wrote Soozhana Choi, commodities research head with Deutsche Bank in Asia.

“While the recent price hike is in line with the current pricing system, the move is also likely an effort to incentivize refiners to maintain high runs and ensure ample fuel supplies as China moves into the Q2 seasonally strong demand period,” Choi added.

Meanwhile, technical analysts and chartists alike expect higher oil prices this week. Daryl Guppy, a CNBC contributor and the Founder and Director of said consolidation around $100 a barrel for U.S. crude futures will be the theme this week.

Dhiren Sarin, Chief Technical Strategist, Asia-Pac at Barclays Capital, expects a move towards $120.40/75 area for Brent crude. “This target zone is important as it marks the range highs since May of last year and should offer some resistance,” Sarin said. “Moving above $120.75 however, would place the $127 area (2011 peaks) in focus.”