Oil May Extend Losses If Fed Minutes Hint at Policy Pause

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Oil's recent rally to multi-month highs may continue to fade this week if minutes from the U.S. central bank's January meeting - due Tuesday - suggest policymakers favor winding down stimulus earlier than expected, according to the results of CNBC's latest weekly market survey.

Any policy pause signal from the Fed minutes may send the U.S. dollar higher, pressuring the broader commodities complex, respondents said.

"Although we aren't expecting a lot from the Fed's latest round of meeting minutes, we will be looking out for any indications on when QE3 (quantitative easing) may be drawing to a close," said Chris Tedder, research analyst at FOREX.com. "Also, it will be interesting to see what the Fed's take on the U.S.'s abysmal Q4 GDP data is."

The U.S. dollar jumped against the yen after the G-20 meeting over the weekend failed to single out the weakness in the Japanese currency. The dollar rose to 93.90 yen, having bounced from a low of 92.20 on Friday. It is within reach of a 33-month peak around 94.47 set a week ago. The dollar is also stronger against the euro with the single currency falling about 2.5 percent since peaking at a 15-month high of $1.3711 on February 1.

A stronger dollar makes dollar-denominated commodities like oil costlier for buyers paying in currencies like the euro and the yen. But not everyone believes the correlation between the currency markets and oil is tight.

The U.S. dollar increased just "moderately" in importance to the oil markets, argued Mike Wittner, global head of oil research at Societe Generale. "Liquidity, or interest rates, remains unimportant for the oil markets." Instead, price movements are "more driven by the straightforward underlying fundamentals," he said.

Oil traders will also be watching U.S. housing data to gauge whether the economic recovery continues to gather momentum. Upbeat housing data, some believe, may build the case for the Federal Reserve to withdraw stimulus and normalize policy sooner than anticipated.

"Housing data should be stronger and Fed minutes can be interpreted as an end to QE is coming at the end of the year," said Mark Waggoner, president of Excel Futures in Bend, Oregon, adding U.S. crude futures may fall to $93.60. "Brent should back off as well. This market has gone way too far, too fast."

Tom Weber, senior commodity advisor at Portfolio Managers Commodity Futures & Options advised entering the market with bearish bets "on a break below" $94.97 for U.S. crude futures. Weber pegged short term downside targets at around "the $93.50 area, then on to the $91.00 area." He added: "If $94.97 holds, look to re-enter long."

Oil prices sank last Friday and Brent futures finished their first negative week since mid-January after an unexpected dip in U.S. industrial production spurred concerns about lagging economic activity.

Brent Says 'Higher'

Brent crude futures for April delivery tumbled to a low of $116.28 per barrel on Friday, down $1.72, before recovering to settle off 34 cents at $117.66. The contract ended the week down $1.24 or 1 percent, its first loss since the week ending January 13. U.S. crude shed $1.45 to settle at $95.86 per barrel. For the week, U.S. crude managed a small gain of 14 cents a barrel.

Out of 12 respondents, exactly half expect prices to fall this week while five - or more than 40 percent - say prices will fluctuate around current levels. A single respondent - David Kotok, chief investment officer at Cumberland Advisors - expects Brent crude to gain. "Watch Brent for clues to global direction," Kotok said. "Brent says 'higher'."

The head of commodity research at Commerzbank Eugen Weinberg believed economic data from the euro zone will improve, helping support the price of oil. Production cutbacks from the Organization of Petroleum Exporting Countries (OPEC) should also put a floor on the price, he said.

"Tighter OPEC supply coupled with a brightening economic situation is likely to spark further price rises," Weinberg wrote in a report on February 15. Latest data from the consultant firm Oil Movements indicate that OPEC is curbing supply, he noted. In the four weeks to March 2, OPEC's oil shipments - excluding Angola and Ecuador - will decline to 23.5 million barrels per day, putting them at their lowest level since March 2012.

(Read More: OPEC Lifts 2013 World Oil Demand Growth Forecast)

Societe Generale's Wittner agrees. Downside economic tail risks have diminished sharply while the base case economic outlook continues to be solid if unexceptional, fed by positive macro data flow for the U.S. and China, Wittner said. "Oil fundamentals are solid, with tight crude stocks in Europe and Japan, and tight diesel and heating oil stocks in the U.S., Europe and Japan."

Sean Hyman, editor of the Ultimate Wealth Report, said China's resources-hungry economy, rather than the U.S. or Europe, would set the tone for oil.

"The recovery that has begun in China will likely trump the Fed minutes," Hyman said. "China's industrial production has seen four monthly increases in a row and its last GDP reading ticked up notably from 7.4 percent to 7.9 percent. It wouldn't surprise me if we see oil consolidate some sideways since both WTI and Brent have had some pretty good run-ups lately. So I'm mainly neutral for next week but do have an upside bias overall."