Oil Curbed by 'Fountain' of North American Supply: Survey

Oil rigs in the South China Sea.
Paul & Paveena McKenzie | Oxford Scientific | Getty Images
Oil rigs in the South China Sea.

Oil prices may rise this week, boosted by expectations of further weakness in the U.S. dollar against its European counterpart and on indications global growth is improving, according to CNBC's latest survey of oil market sentiment, though gains may be limited by increased supply from North America.

Still, output cuts announced last week from top exporter Saudi Arabia may continue to provide support, argued Tom James, chairman and co-founder at Singapore-based energy consultancy Navitas Resources, who has a 'bullish' recommendation on crude oil this week.

Currency market action will be another positive driver this week, James said. The U.S. Dollar Index's failure to break resistance levels at around 80.75 last week provided a bullish signal for commodity markets including crude oil, he noted, adding "key" upside price targets for Brent crude stood at $120 and $125 a barrel.

(Read More: What's the Next Stop for Crude?)

Last week on Thursday oil prices rallied to multi-week highs, after the European Central Bank left rates unchanged, disappointing euro bears, and Saudi Arabia slashed crude production by 700,000 barrels per day to 9 million barrels a day during the last two months of 2012, according to industry sources quoted by Reuters. Major customers for Saudi crude said the cuts were driven by lower demand.

Benchmark Brent crude oil on Thursday closed up 0.1 percent at $111.89 a barrel after rallying to a 12-week high of $113.29 while U.S. crude finished up 0.8 percent at $93.82 after reaching a September. 19 peak of $94.70.

Almost 60 percent, or seven out of 12 of this week's survey respondents, expect prices to gain this week, three forecast said prices may fall while one forecast prices to hold steady.

However, favorable supply-side themes – highlighted by an expansion in U.S. and Canadian oil supplies due to increases in shale oil production – will keep a strong cap on prices, Gaurav Sodhi, resources analyst, Intelligent Investor told CNBC's "Squawk Box" on Monday.

"I think what we're seeing is all the supply coming out of the United States will place a ceiling on oil into the future," he said. "So I'm not expecting prices to fall, but I wouldn't be counting on them to rise either."

Andrew Su, CEO at Compass Global Markets, a foreign exchange & commodity trading/broker market advisory firm in Sydney, affirmed that view but saw the rise of unconventional oil as a strongly bearish theme.

"The evidence to support the view that the shale boom in the U.S. is and will continue to have a long term impact on U.S crude markets and energy independence continues to build," Su wrote in a daily commentary on Thursday.

"The use of fracking technology to access previously inaccessible reserves of crude has seen U.S. oil production rise above 7 million barrels a day for the first time since 1993. Daily production has risen by a staggering 1.16 million barrels from a year ago with production in North Dakota rising an extraordinary 40 percent last year through to October while production in Texas rose 23 percent," Su said, adding Compass Global went short around $93.30 last week and will maintain this position with an initial price target of $90.00.

(Read More: A US-Style Fracking Revolution for the UK?)

Supply Growth

Dominic Schnider, Singapore-based global head of commodity research at UBS, agrees. Non-OPEC supply, Snider noted, has shown further advances towards the end of the year with production having increased by 600,000 barrels a day year-on-year in 4Q 2012.

"The strength in supply was primarily driven by the U.S. and Canada," Snider wrote in a note co-authored with UBS strategist Giovanni Staunovo on January 12. "Since 2012 supply drags should fade in 2013 and North America remains a fountain of supply, the conditions are favorable that supply growth can strengthen to 700,000 barrels a day year on year in 1Q 2013."

Adding to the bear case, crude oil and product inventories in the U.S. are comfortably above the 5-year average, UBS said.

Overall, Brent crude is likely to dip into the $95-100 range "with rather muted global demand growth at 800,000 barrels a day year on year in 1Q 2013." That said, while demand growth might be soft at the beginning of 2013, UBS said incremental consumption had the potential to "gear up" above 1.2 million barrel a day level in the second-half this year, "which should turn the story and favor a reversal in the Brent price to $115 a barrel."

Still, short term risks persist both on the downside - if U.S. economic data this week undershoot expectations, and on the upside - if the threat of supply disruptions to Middle East supply resurfaces.

Though 'neutral' for the week, Kirk Howell, partner at Spy Ridge Capital said he'd "accumulate hedged options and volatility over the next few days…implied volatility of the WTI options is at extremely low levels (22 percent in the March contract). It of course can get cheaper but I believe the risk-reward is insanely high especially with U.S. Retail Sales (December) Tuesday and the Iran nuclear talks Wednesday."

(Read More: US Oil Output: What It Means for Gulf Producers)

The UN nuclear agency chief Yukiya Amano said on Friday he was not optimistic about talks with Iran next week on getting access to a military base Western powers suspect has been used for atom bomb-related work, Reuters reported.

The comments by Amano, director general of the International Atomic Energy Agency (IAEA), contrasted with a more upbeat assessment given by the Vienna-based UN agency after a meeting with Iranian officials last month.

"The outlook is not bright," Amano said in Tokyo, referring to the negotiations to be held in Tehran on Wednesday on the framework accord the IAEA hopes will enable it to quickly resume its stalled investigation into suspected atom bomb research.