Oil prices will continue to head lower this week as investors attempt to price in a worsening European debt crisis even as policymakers scramble to raise the size of the region's crisis fund in an attempt to halt the contagion, CNBC's weekly survey showed.
Almost 90 percent of the sample group, or eight out of 9 respondents, expect prices to drop this week. Even the sole contrarian in the survey — Peter Turville-Ince, Director of Compass Global Markets in Sydney — had some doubts about the short-term, saying he was "cautiously" bullish about the market outlook.
"Unless we see some coordinated action and more importantly, the ECB (European Central Bank) step up actions to support European banks and sovereign debt woes we may continue to see further weakness," said Turville-Ince, adding that he had an upside price target of between $83 and $85 a barrel for U.S. crude futures "only on a bounce for now and no real directional change." Support towards $75, he said, "should limit any downside movement for now."
U.S. crude futures fell 11 percent last week, settling $2.60 a barrel lower on Friday at $77.85 a barrel. That's the lowest price since Aug. 9. Brent crude for November delivery on Friday fell $1.87, or 1.8 percent, to $103.62 a barrel on the London-based ICE Futures Europe exchange. The price plunged more than 7 percent last week to post its biggest loss since May 6.
Europe's debt crisis and the solutions needed to get the fiscal problems — and increasingly the region's banking sector — under control will continue to set the tone for global financial markets this week.
Tom James, Director & Co-founder of Navitas Resources said the U.S. dollar would continue to thrive as a relative safe-haven as the Eurozone crisis persisted. "Real driver is euro versus dollar," James said. "If Europe falters into further crisis making the dollar look the less uglier duckling of them all then that will drive us down."
Despite a stronger close on U.S. equities on Friday, Asian markets turned sharply negative Monday. The Nikkei 225 sank to a fresh post-quake low while risk assets fell broadly. Clearly, investors remain very skeptical about whether Europe's policymakers have the firepower or the political will to 'shock and awe' the market with an aggressive increase in the debt crisis fund.
"The goal of the G20 is no longer to promote growth, but simply to slow the impending train wreck long enough to build a bridge across the abyss," said Tom Weber, Managing Director at PFGBest. "The solution right now seems to consist of throwing money at the problem, rather than systemic reform. This may be where we even begin to see more intense competitive currency devaluations."
Weber added: "Fundamentally, oil doesn't need to move lower. However, massive investor liquidation via margin calls may move all commodities lower."
Key data from the U.S. this week — including new home sales, consumer confidence and durable goods orders — will probably underline the recent trend of slowing growth. Poor U.S. data combined with more stress out of Europe will weigh on equities, dragging down the oil market in turn. "Stock indices will be like a black hole sucking everything down," said Excel Futures' Mark Waggoner.
Dhiren Sarin, Chief Technical Strategist, Asia-Pacific at Barclays Capital, elaborated on the correlation between the stock markets and commodities, noting pronounced commodity market weakness tended to lag cyclical tops in equity markets. "It is a similar story this time round where commodities are responding negatively following the breakdown in global equities late last month."
From a technical perspective, Sarin said Nymex crude has breached an important support area around $85.50 on a weekly chart basis, a sign of further losses to come. "Breaks through this trend following indicator, called weekly cloud support, have been a fairly reliable signal to suggest a shift in medium term trends, in this case favoring further bearish pressure."
While some crude oil investors caught on the wrong side of the trade may be smarting from the recent price falls, consumers won't be complaining at lower prices at the pump.
The average price for a gallon of gasoline in the U.S. tumbled 12.23 cents in the past two weeks and appeared poised to drop even more as crude oil prices weaken, the nationwide Lundberg survey showed on Sunday, Reuters reported. Some economists have described lower gasoline prices as a form of stimulus for consumers, leaving them with more money to spend on other goods and services.
Although bullish themes are present in the current market, analysts expect them to be short-lived. "Current bullish supply disruptions in Nigeria and the U.K. are temporary, and peak Atlantic hurricane season ends in mid-October," said Michael Wittner, the head of oil-market research at Societe Generale. "As these bullish factors fade, Libyan production will be in the process of resuming a bearish factor."
Wittner added: "Last week's declines were part of the process of the oil markets starting to price in a weaker economic and oil demand growth environment. We believe crude oil prices are due for a significant decline, which will ratchet the oil complex down into a lower trading range that will last through 2012. Although prices don't move in straight lines, in our view this is what is happening. We reiterate our bearish forecast, for Q4 2011 prices of $98 for Brent and $73 for WTI."