Oil Looks ‘Overbought’ as Brent Nears $110

Matthew D White | Peter Arnold | Getty Images

Benchmark Brent crude oil prices may test $110 a barrel this week, extending last week's rally to fresh multi-month highs amid lingering fears of Middle East supply disruptions and expectations of improving U.S. demand after forecast-beating jobs data, according to CNBC's latest survey of oil market sentiment.

Still, the risk of a correction lower in oil prices is getting stronger. A minority of respondents in this week's survey warned last week's 5 percent rally in Brent and 6.7 percent jump in U.S. crude futures seems over-extended and doesn't reflect still subdued fundamentals of only modestly improving demand. The U.S. fuel stockpiles - although in seasonal decline – are also above the upper limit of the average range for this time of year, they added.

Almost three-quarters of respondents polled, or eight out of 11 (about 73 percent), said prices will rise this week while the remaining three, or about 27 percent, said a correction is due.

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"I expect that the run-up is almost over," said Mark Waggoner, President of Excel Futures in Bend, Oregon. "Look for WTI (West Texas Intermediate, the crude grade underlying U.S. futures) to break back below $100 next week. Demand is still not as high as it could be. The push to fill retail outlets should be done now (ahead of the high-demand U.S. summer driving season, which runs from runs from around late May to early September)."

Gasoline is likely to lead the broader energy complex lower, Waggoner added, on expectations "stockpiles will jump because utilization is so high. Look for a major drop in next 30 days."

Others believe an improvement in U.S. consumer confidence generated by the housing market recovery will boost gasoline demand this summer.

"Historically, the summer months see an average gain of about $10, calculated by looking at average returns using data from 1983," said Dhiren Sarin, Chief Technical Strategist for Asia-Pacific at Barclays Capital in Singapore. "The seasonal backdrop is also favorable. We prefer buying the dips and would look for the $103-103.50 area to come under threat" for WTI.

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Commodity market reaction to Friday's stronger-than-expected U.S. jobs report diverged sharply. Copper and gold declined after the U.S. dollar Index hit a three-year high on expectations that the payrolls beat would build the case for the Federal Reserve to scale back stimulus later this year. Oil, however, managed to shrug off tapering fears, taking the jobs numbers at face value as evidence of traction in the U.S. recovery.

"Both WTI and Brent traded in tight ranges prior to the U.S. NFP (Non-Farm Payrolls) and rallied sharply on the better-than-expected numbers," ANZ analysts noted in their 'Commodity Research' daily on Monday.

"The NFP numbers provided the fireworks but the news flows emanating from Egypt also added an early boost as protests against the ousting of the former president and protests near the Suez Canal raised alarm bells."

Egypt's Muslim Brotherhood accused the country's military of massacring dozens of its supporters during dawn prayers in Cairo on Monday, as Egypt's deadliest day in nearly two years pushed the country toward armed conflict, Dow Jones reported.

At least 53 people were killed and more than 400 wounded, Egypt's official media said, in a clash between the military and supporters of Mohammed Morsi, who had gathered near the site where Morsi has been held under house since he was ousted as president last week.

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Gaurav Sodhi, Resources Analyst at the Intelligent Investor in Sydney, told CNBC Asia's "Squawk Box" on Tuesday that although oil's security premium "deviates" from the fundamentals, the market was trying to price in a "higher than usual" risk of supply disruption from the Middle East.

"This unusually high price could persist for some time," Sodhi said. "I wouldn't necessarily see this as a wonderful shorting opportunity although I do acknowledge it probably is a tad high."

While Friday's forecast-beating U.S. jobs report no doubt helped generate more momentum for the oil bulls, sentiment data from IG Markets provided to CNBC on Friday ahead of the payrolls release showed IG clients were covering short positions, or bearish bets, in anticipation of a strong jobs print though overall they were positioning for a short-term correction.

Exactly 100 percent of IG clients bought in the past hour to cover short positions in Brent and 88 percent in the past hour to cover short positions in WTI ahead of the June jobs report, according to the IG data, received Friday just before midday Singapore time.

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However, 57 percent of IG clients with open positions in Brent crude, and 75 percent in U.S. crude futures, expect prices to fall. That picture was little changed Monday, with latest IG client positioning showing 73 percent short WTI and 57 bearish on Brent.

Sean Hyman, editor, Moneynews at the Ultimate Wealth Report admitted that there will be "pullbacks along the way" though is forecasting $120-$125 for Brent crude and $120 for WTI in the coming months."

Commerzbank's Head of Commodity Research Eugen Weinberg said Brent crude should draw support from expected declines in North Sea oil loadings due to rig maintenance work. Supply of the four North Sea oil types (Brent, Forties, Oseberg and Ekofisk) will decline in August to 754,000 barrels a day, a nearly 100-thousand-barrel-a-day reduction as compared with July.

"Forties is the most important of the four aforementioned oil types that largely determine the Brent price" and maintenance is likely to cut supply of the crude grade oil by 135,000 barrels a day, Weinberg said in a research report on Monday.

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"That said, the reduction does not come as a surprise: in its most recent monthly report, the IEA (International Energy Agency) pointed out that maintenance work will result in above average production outages in the North Sea this summer. Nonetheless, Brent should find support from these figures," he added.