Oil markets this week may reverse a rally that's sent benchmark U.S. futures surging above $90 a barrel on claims by European leaders that they're making progress on containing the region's debt crisis, CNBC's weekly survey showed.
Six of the week's sample group of 15 respondents said prices would fall this week while five said they would rise. Four respondents in the survey expected prices would remain unchanged.
"From an oil perspective, the apparent progress that has fed market optimism simply comes from the fact that European leaders have finally gotten down to brass tacks; they are devising and evaluating detailed plans to attack the problems," wrote Societe Generale commodity analysts Michael Wittner and Remy Penin.
Optimism on Europe and overall risk appetite has wavered in the past week, but has been resilient and remains high, the analysts note. "As a result, we think the results of the European and G20 summits may disappoint the markets, and result in downward price pressure."
Under an emerging deal likely to be struck on Wednesday, Greece's debt will be reduced, European banks will be recapitalized, the euro zone's rescue fund will be scaled up to provide partial insurance in sovereign bond markets, and Italy will be pressured into getting serious about economic reform.
"Europe holds the key," said Excel Futures' Mark Waggoner. "Many markets are at the end of their rope. Europe disappoints is my bet."
Despite an outlook that will be continue to be shaped by the political chicanery in Europe as its leaders struggle to build consensus, the survey's bulls argued higher prices are reflecting a sharper focus on the fundamentals, especially tightening physical supply.
"Oil markets have re-focused on the current fundamentals of the physical crude markets, which are tight in Europe and Asia and on the U.S. Gulf Coast," Societe Generale noted. "The high level of uncertainty is causing oil market participants to trade on the current bullish physical situation rather than an uncertain or bearish forward-looking outlook."
Meanwhile, recent China manufacturing datasuggested the economy is not at risk from a 'hard-landing'. Preliminary HSBC China manufacturing purchasing managers index rose to 51.1 in October, rebounding from a final reading of 49.9 in September and from a three-month contraction.
However, recent analysis from Platts showed China's apparent oil demand in September grew just 3.1 percent year on year to 36.63 million metric tons, or an average of 8.95 million barrels per day. This is the lowest level that the country's oil demand has reached this year, according to the Platts' analysis based on crude oil statistics recently released by the Chinese government.
September was also the second straight month that China's oil demand has slipped to less than nine million barrels a day. "Refinery throughputs and net product imports declined due to scheduled maintenance and slowdown in demand for refined products," said Calvin Lee, Platts senior writer, China. "Chinese refineries are also reluctant to boost production too much because of depressed refining margins."
Phil Flynn, Vice President and Energy Analyst at PFGBest said if China oil demand slows to single digit growth then prices should ease. "On top of that the Chinese government has taken steps to try to rein in inflation. That potentially means that demand for oil has peaked or the Chinese are using reserves that will have to be replenished."
Peter Turville-Ince, Director of Compass Global Markets, has a 'neutral' call for the market this week but said he is bullish over the medium term. "We will be short-term bulls again if the euro zone actually steps up and implements a plan to support the region. Demand has picked up in September in the U.S. which shows how robust demand still is even when the global outlook looks so weak," he said.
Expectations that Libyan oil exports will fully resume in the post-Gaddafi era are adding to pressure on the Brent crude market.
Eni SpA's giant Elephant oil and gas field in Libya — which accounts for about 25 percent of the Italian oil major's Libyan oil and gas production — could restart as early as next month as damage at the site has been limited, a top executive at the Italian company's local joint venture said Monday, according to a report from Dow Jones Newswires.
Deutsche Bank's Adam Sieminski said Libyan production growth estimates for 2012 may get a boost from news of Gaddafi's death as rebel forces took control of the Sirte.
"Libya's oil output is starting to recover, with consensus estimates that some 400,000 barrels a day of production is now flowing. Gaddafi's death may slightly speed up the timetable for improvements in governance, but we believe that oil field and port repairs will still take considerable time and effort," Sieminski wrote in a report.
Libyan oil production may resume towards the end of this year "which may see some limited pressure on Brent in the short-term but ultimately this production makes up for a very small proportion of global output," Turville-Ince said. "We remain medium term bulls above support at $105.00. Only a breach here would have us concerned and consider going short."