Oil Prices May Fall Below $80/bbl as Bank Foreclosure Probe Weighs: Survey

Oil prices may fall below $80 a barrel this week as regulators probe the banking industry’s foreclosure practices in the U.S., offsetting expectations of more quantitative easing by the Fed, a CNBC poll of traders and analysts showed.

Oil Barrels
Oil Barrels

Investors are worried that banks did not follow proper due diligence when foreclosing on homes whose owners were not making mortgage payments, which could result in costly litigation, fines and additional mortgage repurchases, Reuters reported.

Bank of America shares hit their lowest in more than a year on Friday, while the KBW bank indexfell 2.4 percent.

“The evolving foreclosure investigation may slow oil’s Fed inspired rise,” said Phil Flynn, senior energy analyst for PFGBest Research. “We should be a bit range bound” this week, he said.

Mike Sander at Sander Capital Advisors reinforced the point, saying oil’s correlation to the stock market and, by association the listed banks, makes it vulnerable to weakness.

“The price of oil is highly hinged on how well the Dow Jones is doing,” Sander said. “Some sectors seem to be doing very well, like tech, but with the foreclosure halt bringing banking shares to new year lows, I don’t see the equities market pushing to new highs. If equities stall, oil will as well.”

CNBC’s survey correctly predicted that prices would fall for last week. For the week that ended October 15, Nymex crude futures for November delivery dropped $1.41 a barrel, or 1.71 percent, settling Friday at $81.25/bbl.

This week, four out of 9 respondents (about 44 percent) forecast price would extend declines, five (around 56 percent) expect the market to remain unchanged. There were no bullish calls.

Dollar Debasement

On Friday, Fed Chairman Ben Bernanke built the case for a second round of purchases of long-dated Treasurys, or quantitative easing, to help ensure the recovery stayed on track.

That’s going to cause further debasement of the U.S. dollar, propping up the broader commodity complex, said Gavin Wendt, Founding Director and Senior Resource Analyst at MineLife Pty Ltd.

“Oil should manage to hold its ground again this coming week,” Wendt said. “The major factor pure and simple is the U.S. dollar, which shows no sign of shaking off its recent weakness, especially given Ben Bernanke’s comments on Friday. Whilst the dollar struggles, oil and virtually all other commodities, will continue to outperform.”

Still, many investors feel the dollar sell-off has run its course since further accommodation by the Fed has been well flagged and factored into prices.

“The dollar has been panicking lower…other currencies, gold and oil seem like they have been panicking higher,” said Roger Nusbaum, Chief Investment Officer of Your Source Financial. “Guessing when that will reverse is just that, a guess but Aussie dollar parity has been a stopping point many time before so maybe it will be this time as well.”

The Australian dollar reached parity with the U.S. dollar late on Friday night for the first time since the currency was floated in December 1983.

Peter McGuire, managing director at CWA Global Markets Pty., also expects to see a “sell off” in commodities including oil and gold if the dollar bounces. “From where I sit the U.S. dollar has been the driver for higher energy and gold over the past 6 weeks or so.”

Mark Waggoner at Excel Futures argues the dollar will continue to be the “driving force” in setting the direction for oil prices. A pullback in the short term will push prices down to $79.50 a barrel, he said. Longer term, Waggoner expects a return to $100 a crude “within 6 months and $120 to $130 by July next year."

Akhilesh Kamkolkar, at Orb Investment Management Pty Ltd in Sydney adds: “I'm betting on a big buy of the dollar over the next week or 2... then crude getting slammed.”