Oil prices will likely rise this week, fueling inflation and threatening a fragile recovery in the U.S. as consumers battle $4 a gallon gasoline in some states, CNBC's weekly survey of market sentiment showed.
Weakness in the U.S. dollar, continued unrest in the Middle East and North Africa and a strong start to U.S. earnings season are driving the momentum. "The fundamentals are about as bullish as it gets," said Phil Flynn, market analyst at PFG Best Research in Chicago. "We are being driven by geopolitics, deficits, wars, and the growing lack of confidence in the currency that the commodities are traded in."
That said, many analysts are growing increasingly cautious about the outlook, saying demand destruction is imminent as consumers flinch at high fuel prices leading to fewer motorists on the roads during the peak summer driving season.
Gasoline's national average rose 12 cents in the past two weeks to a national average $3.88 per gallon, according to the latest Lundberg Survey of filling stations released Sunday.
Tucson, Ariz., had the lowest gas average at $3.54, while Chicago had the highest, at $4.27 per gallon, according to the survey, which tracks prices at 2,500 gas stations across the country.
Analyst Trilby Lundberg said if prices haven't peaked now, there's a good chance they will before the summer driving season, which traditionally starts during the Memorial Day weekend at the end of May.
"Gasoline prices might hover around this level, which is at $3.88, and maybe never reach the all-time high which was $4.11 back in July of '08," she said.
Emerging Market Demand
Concern is also building over the demand outlook in emerging markets including China.
China's demand for its three main refined fuels — diesel, gasoline and kerosene — will plateau at first quarter levels for the rest of 2011, China's National Energy Administration said on Friday.
It predicted year-on-year growth in demand for the fuels would slow from 13 percent in the first quarter to 9 percent in the first half of the year and 8 percent in 2011 as a whole.
"Because China dominates the global demand picture, Friday's NEA projections...overall raised eyebrows," said Lawrence Eagles, a JPMorgan Chase & Co. energy analyst based in New York. "Generally, we agree that China's total oil demand growth will slow to a still robust 6 to 7 percent year-on-year over the second to the fourth-quarter. Elevated prices will have a marginal impact, but the primary driver is a strong 2010 baseline, especially in 4Q 2010 when power shortages drew gasoil into power."
A CNBC poll of analysts and traders showed an overwhelming bullish bias for prices this week. Ten out of 11 respondents expect oil prices to rise while one believes prices will remain unchanged. The poll correctly predicted the direction of prices last week.
"The dollar is the governing factor," said Dennis Gartman, a trader and publisher of The Gartman Letter. "It trumps all other concerns, and as goes the dollar, so in contravention shall go crude oil. Prices of crude are still headed higher."
On the New York Mercantile Exchange, front-month crude futures for June delivery settled at $112.29 a barrel on Friday, up $2.63, or 24 percent. Prices have risen in four of the last five weeks. ICE Brent crude futures in London rose 54 cents, or 0.44 percent, to settle at $123.99.
The dollar index , which measures the currency's value against six major currencies, hit a three-year low of 73.735 hit last week. A break of that could open the way for a test of the record low of 70.698 touched mid July, 2008, according to Reuters data.
Currency speculators pared bets against the U.S. dollar for a fourth straight week, according to data from the Commodity Futures Trading Commission released Friday, but were still net short to the total of $24.36 billion.
Bernanke Meets The Press
The April 26-27 Federal Open Market Committee meeting will be the key event risk this week for currencies and commodities. Market participants will look to the post-meeting news conference by Fed Chairman Ben Bernanke on Wednesday — the first regularly scheduled news briefing by a Fed chief in the U.S. central bank's nearly century-long history — to see how the Fed plans to exit from its ultra-loose policy.
Consensus expectations suggest Bernanke will stick to the script and confirm QE2 will wrap up as expected on June 30 and that the signals show the U.S. economy is on a path towards a self-sustaining recovery. Overall, the Fed chairman will likely strike a dovish tone and this will likely confirm the downtrend in the greenback.
"Dollar weakness is a desired policy of Fed and Treasury so it is likely to persist as long as 'orderly'," said David R Kotok, Chairman & Chief Investment Officer at Cumberland Advisors.
Last week, ratings agency S&P cut the long-term U.S. sovereign credit outlook to negative from stable and warned there was a one in three chance it may downgrade the coveted triple-A credit rating within two years if the U.S. didn't agree on a credible deficit reduction plan.
"The S&P downgrade wasn't a game-changer," said Linda Rafield, Senior Oil Analyst at Platts. "It just helped accelerate a sell-off in the greenback that has been underway due to exceptionally low interest rates in the U.S."
Rafield added: "The dollar has been a latent bullish consideration for a long time. Dollar weakness was pushed back due to unrest across MENA (Middle East and North Africa) so nothing has basically changed."