Oil prices will likely gain this week after Friday’s forecast-beating U.S. jobs report though any rally may fade quickly as one month’s data will do little to ease broader concerns about an anemic recovery in the world’s largest economy, according to CNBC's weekly survey of oil market sentiment.
“We expect the recent recovery in the crude oil price will be difficult to sustain in an environment where global growth fails to recover and in the absence of central bank action to stimulate growth,” wrote Deutsche Bank analysts in a report on Friday.
“Prospects for growth will improve from September onwards, which we expect will herald a more constructive environment for global oil markets,” the report said.
U.S. nonfarm payrolls increased by a seasonally adjusted 163,000 jobs last month, the biggest increase since February, even as the unemployment rate ticked up to 8.3 percent, the Labor Department said Friday.
In response, light, sweet crude for September delivery rose $4.27, or 4.9 percent, to settle at $91.40 a barrel on the New York Mercantile Exchange on Friday. The contract reached $91.74, its highest intraday price since July 20, before pulling back slightly. Brent crude on ICE Futures Europe settled up $3.04, or 2.9 percent, at $108.94 a barrel.
Many believe the consensus-beating U.S. payrolls data may represent yet another ‘false dawn’ for markets in much the same way as the July 26 remarks by European Central Bank President Mario Draghi’s that the ECB “is ready to do whatever it takes to preserve the euro.”
The recent run up in prices “was based on expectations that the global economy would get another short term booster shot from the Fed, ECB, China,” said Aiden Bradley, Managing Director and Head of Asian Oil and Gas at CIMB Research in Singapore. “Just how many plasters do people expect can be put over this gaping wound?”
Bradley said he remained bullish on the outlook for oil in the medium-term but expected weakness in the near-term.
Mideast Tensions
An intensification of the tensions in the Middle East may bolster the risk premium in oil prices this week, respondents said. Islamist gunmen killed at least 15 Egyptian police on Sunday and seized two military vehicles to attack a crossing point into Israel, the deadliest incident in Egypt's tense Sinai border region in decades.
After speaking to his sources in Egypt, Mike Baghdady of Training Traders said he believed the attack “seems to be more representative of the lawlessness” in the Sinai Border area and might be drug- trafficking related.
“The Egyptian Israeli relationship is quite mature, tempered with close communication and this event should not have much impact if any on the crude market plus the natural gas pipeline (supplying Israel) was not targeted,” said Baghdady, who is of Egyptian descent. “Egypt is not a big oil producer and the military is very much in control and will not allow anything to affect the Israeli peace.”
Egyptian President Mohamed Morsi called for an emergency meeting with the military, and state TV reported that the Rafah border crossing would be closed indefinitely. "Tonight's attack in Sinai will not go without a response," a Morsi spokesman said.
Meanwhile, Iran warned against foreign intervention in Syria on Sunday and said the conflict there could engulf Israel, Iranian media said. Iran has also requested help from Turkey and Qatar to secure the release of 48 Iranians captured over the weekend in the Syrian capital by rebels who insist the group are undercover spies and not innocent pilgrims caught up in the continuing conflict.
Separately, a Russian military source was quoted on Friday as saying Moscow was sending three naval ships and up to 360 marines to Syria, but the Defense Ministry said there were no plans for the vessels to dock in the war-torn country.
The attack on the Egypt-Israel border “just adds to escalating situation in Syria, where it seems all interested parties are involved: the kidnapping of the Iranian pilgrims, the request for Russian aid, the U.S. covert involvement, the fighting in Turkey etc.,” said John Kilduff, Partner at Again Capital. “It looks like the lid is about to be blown off the situation, region-wide.”
Kirk Howell, Chief Operating Officer of SunGard's Kiodex, said technically the market is looking bullish “but I would not be interested in betting on a geopolitical event to push the market substantially higher. It's possible but not something I would bet on as the most likely outcome.” Howell recommended getting upside exposure through call options.
However, the upbeat payrolls and renewed Mideast tensions failed to generate much follow-through buying on Monday. U.S. crude oil futures slipped but stayed above $91 a barrel while the market awaited Chinese trade data due later this week for trading cues.
A 'Win-Win' for Oil Prices?
Six out of 11 respondents, or about 55 percent, expect oil prices to rise this week; three expect prices to fall while the remaining two believe prices will remain around current levels, CNBC's weekly survey of oil market sentiment shows.
Speaking ahead of the release of the jobs numbers, IG Markets’ strategist Justin Harper said the data – positive or negative — presented “a win-win” for oil prices.
“A weak read may further calls for QE3 from the Fed and lift energy markets,” Harper explained. “A strong read may be seen that the economy is still showing signs of recovery with employment figures bottoming out.”
Oil prices have been “caught in the crossfire” of a “triple whammy of disappointment” this week, he added, as U.S., U.K. and European central banks have failed to ease monetary policy and give commodity prices a lift. Seventy three percent of IG Markets’ clients are holding long positions on U.S. crude.
Harper also noted on the supply and demand front the risk of Tropical Storm Ernesto turning into a Category 1 hurricane “which could disrupt production and refining capabilities out of the Gulf of Mexico.” U.S. crude could make a more sustained break above the $90 level if the hurricane materializes, he said.
Tropical Storm Ernesto kept on a westerly course in the Caribbean Sea on Sunday and was expected to strengthen slowly over the next 48 hours, soaking Jamaica as it passed the island on its way to Mexico's Yucatan, U.S. forecasters said.
From a technical perspective, Dhiren Sarin, Chief Technical strategist for Asia-Pacific at Barclays Capital said Brent crude appeared range-bound between $102.10 and $108.20 “and we expect further range trading between these levels in the near term with a modest upside bias.’
He added: “Our ideal trajectory is for a push higher out of range towards $109 before we look for a top. The risk to this view is that euro zone concerns come back in the forefront — as Spanish and Italian 10-year yields fly higher — in which case a breakdown through $102.10 would be a signal to flip to a bearish outlook.”
—By CNBC's Sri Jegarajah
Follow Sri Jegarajah on Twitter: @cnbcSri
