Oil and Gas

Oil to Stay Rangebound as 'Fiscal Cliff' Worries Offset China Optimism

Sri Jegarajah
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Benchmark oil prices will continue to remain in a tight range this week as the continued lack of progress on averting the U.S. "fiscal cliff" and a political crisis in Italy offset positive sentiment from data showing an improvement in China's economy, according to CNBC's latest survey of oil market sentiment.

"My prediction is that when an agreement is made by the politicians in the U.S. you will see oil move with the equity markets, most likely in an upward direction," said Matt Grossman, chief equity market strategist for the Adam Mesh Trading Group. "The price will continue to be range-bound until the 'fiscal cliff' issue is solved."

(Read more: Looking for Signs of a 'Fiscal Cliff' Deal)

Results are fairly evenly-balanced this week, suggesting a lack of clear price direction in the short-term. Four out of 11 of this week's survey respondents expect oil prices to hold at current levels, four say prices may rise while three said prices may fall.

Brent oil prices rose slightly on Monday after Chinese data showed oil imports increased last month, helping end a five-day slide for the global benchmark.

Brent for January delivery rose 31 cents to settle at $107.33 per barrel, while U.S.-traded West Texas Intermediate fell 37 cents to $85.56 per barrel, posting a fifth day of losses, Reuters reported.

The divergence widened the spread between the European and U.S. benchmarks to around $21.77 a barrel, from as narrow as $20.45 last week.

Bullish respondents highlighted stronger U.S. jobs numbers on Friday and an improvement in economic data from China published over the weekend though cautioned renewed political turmoil from Europe as a key macro risk. Italian bond yields jumped after Prime Minister Mario Monti's announcement that he would step down after approving the budget for 2013.

"Despite China's improving economy, prices could come under some pressure as fresh uncertainty over Europe tempers sentiment," ANZ commodity analysts led by Mark Pervan wrote in a report on Tuesday, adding prices would remain within recent $5 a barrel trading ranges.

Brent crude prices appeared to benefit more from China data (second largest consumer) which showed that implied oil demand surpassed 10 million barrels a day for the first time in November and oil imports hit the third-highest on record, ANZ said.

Moreover, Chinese refinery throughput reached a record 10.125 million barrels per day in November and was up 9.1 percent from the year-ago period while China's crude imports rose further, "providing more evidence of economic recovery," according to ANZ.

Still, China's exports growth slowed to a much lower-than-expected 2.9 percent in November, a customs report said on Monday, suggesting the recovery was uneven.

A potential bullish driver for markets this week may be if the U.S. Federal Reserve extends "Operation Twist" – a program where the central bank sold short-term securities and bought long-term bonds at the pace of $45 billion monthly to 'twist' the yield curve to bring down longer-dated securities in an effort to reduce borrowing costs.

Yu-Dee Chang of ACE Investment Strategists told CNBC Asia's "Squawk Box" markets may be disappointed if the Fed fails to extend the program. "There may be a downside surprise if it doesn't happen," he said.

From a technical basis, Brent crude prices have room to ease initially towards the $105 or $106 zone and may test $104 - "an important low and strong support," said Dhiren Sarin, chief technical strategist, Asia-Pacific at Barclays Capital.

Sean Hyman, editor of the Ultimate Wealth Report – though maintaining a long-term bullish view on expectations of a recovery in key emerging market consumers of oil - characterized Brent crude as "oversold" and said a break of support levels around $105 would make him bearish near-term.

"Overall my view is that China and India are beginning a recovery now that will show up and become more obvious throughout 2013 which will be bullish for commodities, especially oil," Hyman said. "The only thing that would change that view is if we went back into a global recession, which at this point I don't believe will happen. But we must see how the fiscal cliff is dealt with first."

OPEC production talks this Wednesday will also be a focus for markets.

Saudi Arabian Oil Minister Ali al-Naimi said Monday that the main aim of the Organization of the Petroleum Exporting Countries when it meets is to keep the balance of the global crude markets to serve the interests of producers and consumers, Dow Jones Newswires reported.

Balancing the market will also help the growth of the global economy, particularly the developing countries, Naimi said, according to the state-run Saudi Press Agency. OPEC is expected to maintain its current oil production ceiling of 30 million barrels per day, after officials from member countries said earlier Monday conditions in the market support the status quo.

"Current output levels run above global demand, U.S. shale reserves are likely to dominate OPEC talks, but disagreements between OPEC leaders could hamper the group's ability to respond," said Malcolm Gissen, co-manager at Encompass Fund.