Oil prices will likely reverse the gains made in the past three weeks as debt woes in both the U.S. and Europe continue to weigh on sentiment, CNBC's weekly survey of market sentiment showed.
Democrats and Republicans are locked in a standoff over the way forward on a deficit reduction package that's necessary to raise the debt ceiling by the Treasury-imposed deadline of August 2. If a deal isn't reached by the deadline, the world's largest economy may default on its obligations, a scenario Fed Chief Ben Bernanke and White House Budget Director Jacob Lew have described as "calamitous."
A CNBC poll of analysts and traders showed four out of 10 respondents expect oil prices to fall while two believe prices will remain flat this week. However, four out of the ten believe prices will continue climbing. The poll correctly predicted the direction of prices last week.
"Major economic data and monthly oil reports are done so the market will be obsessed with the debt situation in the U.S. and Europe for the immediate future," said Linda Rafield, Senior Oil Analyst at Platts. "The Brent market looks a bit more vulnerable on the downside than Nymex crude."
Rafield expects Brent to test the $111 level while U.S. crude futures could trade in a range between $93.50 and $98.00. "The dollar should steady out and commodity bulls will bail out if that is the case."
Dhiren Sarin, Chief Technical Strategist at Barclays Capital is also watching the $93.50 level. Sarin has a 'neutral' call for oil prices this week but said "on the flipside, back below $93.50 would warn of a return to range lows near $90.00."
On the New York Mercantile Exchange, front-month crude futures for August delivery settled at $97.24 a barrel on Friday, up $1.55, or 1.6 percent. For the week, front-month crude advanced $1.04, or 1.08 percent, from the $96.20 close on July 8. In three weeks, front-month NYMEX crude futures have gained $6.08, or 6.7 percent, their biggest percentage gain for three weeks since the week to April 8.
In London, ICE Brent for September delivery, the new front month, settled at $117.26 on Friday, gaining $1, or 0.86 percent, after trading between $115.16 and $117.75. For the week, front-month Brent crude dipped $1.07, or 0.9 percent, from the $118.33 close on July 8, following two consecutive weeks of gains.
China, Japan Demand
Despite a slowdown in emerging economies as governments tighten interest rates to contain inflation, oil bulls argue growth rates in countries like China of above 9 percent will still support robust demand for natural resources.
"Investors need to be acutely aware that the emerging economies are still growing at 3 times the pace of the developed economies and have true energy demand," said Andre Julian, CFO & Senior Market Strategist at OpVest. "Even after 13 interest rate hikes, China still grew 9.5 percent, which has reversed the recent discussion regarding a hard-landing in China."
Demand is also getting a boost from "the rebuilding of Japan, which is occurring at a much quicker pace than anyone expected," Julian said.
Japan's demand for crude and oil products to fuel power plants could triple if the country shuts all its nuclear reactors due to growing public safety concerns after the March earthquake and tsunami.
Japan, the world's third-largest oil consumer, may need to import an additional 350,000 barrels per day of crude and fuels to make up for the loss after the March earthquake and tsunami, according to Morgan Stanley. That would be 8 percent of Japan's total oil consumption.
That said, Chinese implied oil demand rose 1.1 percent in June from a year earlier, the slowest growth in more than two years, as oil plants underwent heavy maintenance amid poor refining margins and Beijing's tightening policy cut into oil use, Reuters reported on July 13.
Deutsche Bank Commodities Strategist Soozhana Choi said the "mid-year softening in China's oil demand growth rates seems to be materializing as we anticipated" though the bank anticipates a recovery in oil consumption in the fourth quarter.
"Short-term weakness in domestic demand, driven by inventory de-stocking as well as the impact of credit tightening and power shortages will dissipate in Q4, consequently China's commodities demand and imports are expected to recover, according to our China economics research team," Choi wrote.