Jonathan Barratt, of Commodity Broking Services, one of our most seasoned commentators on Squawk Box, is never short of colorful opinion or two on the oil market.
This week he characterizes the short-term outlook a lot how Mohammed Ali described his opponent Sonny Liston back in 1964 before the world heavyweight championship: a big ugly bear.
Those bears look set to deliver what could be another sucker-punch to a market already on the ropes. A CNBC poll of analysts and traders showed an overwhelming negative bias for prices this week. Eight out of 12 respondents expect oil prices to drop, three believe prices will rebound while one expects prices to remain little changed.
Barratt forecasts a possible break of $95 a barrel for U.S. crude futures this week, a move that may signal a deeper pullback towards $80.
U.S. crude futures for June delivery rose 68 cents to settle at $99.65 a barrel on the New York Mercantile Exchange on Friday, closing below $100 for a third-straight session. That said, prices managed to claw back a 2.5 percent gain last week against a 15 percent loss in the week ended May 6.
Investors focusing on the fundamental picture argue that the catalyst for the sell-off was less optimism about the strength of the U.S. economic recovery. Margin hikes imposed on crude oil and gasoline served to aggravate the wave of selling.
“History suggests a change in margin like that of the CME is a death verdict,” said David Kotok, Chairman and CIO of Cumberland Advisors. “The CME could have isolated silver and stopped. They didn't. Now markets do not know what is next nor when nor why. Uncertainty premiums are impossible to measure but we all know they are there.”
U.S. economic data will take on heightened prominence this week given the questions about the quality of the recovery. Data calendar this week features Empire State Survey, Philly Fed Survey, Existing Home Sales, Housing Starts and the National Association of Home Builders Survey.
“Any hint of disappointing data and the crude market will take a look at the $90/barrel level,” said Linda Rafield, Senior Oil Analyst at Platts, adding that the margin hikes were not the central reason behind the recent downturn.
“These were markets saturated with longs and there were no bullish headlines out there to sustain what had become overextended rallies. The people holding positions in all likelihood have deep enough pockets to withstand a margin hike of the magnitude that CME inflicted,” Rafield added. “The days of small undercapitalized locals who trade for themselves have in all likelihood been obliterated by electronic trading.
The last minutes of the Fed’s FOMC April meeting will also be closely scrutinized for any signals on an exit strategy. Some argue that the sharp pullback in oil prices has vindicated Fed Chariman Ben Bernanke’s view that the inflationary effects will be “transitory.”
“Volatility will continue to be the main theme,” said Serene Lim, Oil Strategist at ANZ Research. “Dollar will be dictating the direction of oil market. Focus will be the rhetoric of the FOMC Minutes — a major factor to any dollar swings next week.”