Oil Market Sentiment Evenly Split; Some See ‘Demand Destruction’: Survey

Sri Jegarajah|Reporter, CNBC Asia Pacific

Sentiment towards benchmark oil prices is evenly balanced this week, with some in the markets saying higher U.S. gasoline prices are causing ‘demand destruction’ while others say supply risks focused on Iran will continue to keep prices well-supported, CNBC's weekly survey of market sentiment showed.

U.S. drivers paid 3.8 cents more for a gallon of gasoline this past week, the U.S. government said on Monday. U.S. gasoline prices hit $3.87 a gallon in the week ended Monday, up more than 27 cents in the past month and the highest level recorded for March, according to data from the Energy Information Administration's weekly survey of service stations.

“We do continue to see some demand destruction at these price levels as shown by the DOE (Deparment of Energy) reporting US gas demand is down 7.2 % over the last four weeks from the previous year,” said Kirk Howell, Chief Operating Officer, of SunGard’s energy and commodities business SunGard Kiodex. “If emerging economies slow down at a more rapid rate, crude could drop rapidly. Upside risk of course still exists with any significant event out of Iran.”

Exactly forty percent, or four out of ten respondents, polled in a weekly CNBC poll of analysts and traders, expect oil prices to fall this week. Four believe prices will rise and two expect no change.

CNBC’s oil sentiment survey correctly predicted the direction of oil prices last week. 

London Brent crude fell 17 cents to settle at $125.81 a barrel on Friday for the week while U.S. light, sweet crude dropped 34 cents to settle at $107.06 a barrel on Friday, reversing weekly gains for during the prior week.

Market participants will continue to debate the possibility of Washington releasing crude oil from the Strategic Petroleum Reserve to help take the edge of high gasoline prices.

Oil fell last Thursday on reports that President Barack Obama discussed on Wednesday a release from the SPR with U.K. Prime Minister David Cameron. Obama’s political opponents are capitalizing on high energy prices as this election year.

Oil prices, partially recouped losses after a senior Obama administration official said “no agreement was reached” and that the two countries will continue to work together to “address energy security and oil price issues.”

Top U.S. officials including Energy Secretary Steven Chu and Treasury Secretary Timothy Geithner have said publicly in recent weeks that a U.S. SPR release is among the options the government is considering.

Still, Wednesday's meeting was the clearest indication that diplomatic talks were moving ahead, Reuters reported.

A release of reserves would be the second such intervention in the past year after the world's consumer nations sanctioned their biggest ever release last June in the wake of Libya's civil war.

Francisco Blanch is Managing Director and Head of Global Commodity Research at BofA Merrill Lynch Global Research said it would be “irresponsible” to release strategic stocks without having a proper reason to do so.

“High prices are just not a reason to release inventories,” Blanch told CNBC on Tuesday. “A good reason is supply disruption from Iran.

So I think at the moment there're not enough good reasons to do so other than politics and I, frankly I'd be a little bit uncomfortable if I saw an SPR release.”

Blanch didn’t completely rule out the possibility of an SPR release but didn’t expect more barrels on the market to have a lasting price impact.

“I don't think it's going to do much to mitigate prices and I don't think it's going to be very effective in the end. So unless we do see a proper disruption in Iranian supplies — which we haven't seen yet — unless we see some military conflict in the region, I don't think it's very likely.” But, Blanch added, “this is an election year and politics may prevail even if it’s not good policy.”