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Oil Prices Primed For Pullback as Bull Move May Be 'Over-Extended': Survey

Oil markets may continue to push higher this week, with the U.S. benchmark possibly testing $100 a barrel, although such an economically-damaging move higher may be short-lived as investors increasingly believe the rally is overdone, CNBC's weekly survey showed.

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Ten of the week's sample group of 14 respondents, or more than 70 percent, said prices would climb this week while two said they would fall. Two respondents in the survey expected prices would remain unchanged.

Although the majority of respondents are bullish, many are making the call with the caveat that they are bulls in the near-term only. Others argue the market could capitulate this week. "I don't see the hype," said Mark Wagoner of Excel Futures. "The market is way overdone. Lower from $100.00."

U.S. crude futures came perilously close to triple digits once again in early Asian trade this Monday. Front-month Nymex crude hit $99.69 a barrel before losing ground as renewed European debt concerns undermined stock market sentiment. Last week the contract settled at $98.99, the highest for a front-month contract since July 26.

"Even as equities weakened last week we saw U.S. crude prices remain well bid and even though this is a bullish sign in the short-term this could reverse very quickly should we see negative news flow out of Europe and if the nuclear threat diminishes in Iran," said Peter Turville-Ince, Director of Compass Global Markets, who has a 'neutral' call for the market this week.

Elevated crude prices for a sustained period of time could deal another body blow to stock markets and global economic growth that is already losing momentum.

"High prices will hurt demand which is already quite fragile given the global uncertainty," said Turville-Ince. "We feel that the run up has been too quick and is not justified just yet. We remain a short-term bear below $100 with stops at $100.60. Above here and there is no doubt that prices could rise as far as $105.00 in the short-term if sentiment shifts and equities rally. We expect a move back towards $94-$95.00 support area before another move higher."

PFGBest's Tom Weber said global slowdown fears would rise the closer WTI gets to $100. "Of course, headline risk can change sentiment in an instant, so we will continue to have tight risk parameters on all positions. It seems that all traders are now Italian bond traders," he said.

Overdone

From a technical perspective, Dhiren Sarin, Chief Technical Strategist, Asia-Pac at Barclays Capital said crude prices had risen too fast and were primed for a pullback: "Although we are near term bullish, upside is likely limited and following a test of $100 in WTI, we would look for topping signs and a pullback to the $95 area."

The market is getting overdone, Sarin added, having posted five consecutive bullish weeks and on the verge of posting a sixth now.

"Previous such occasions were last seen in the 2007-08 run-up when price approached a favorable region for a pullback," he said.

Meanwhile, Daryl Guppy, CEO at Guppytraders.com noted any breakout above $100 has potential for a "rapid move to $110 plus." Phil Flynn, Vice President and Energy Analyst at PFGBest, also predicted a test of $100 followed by a retreat.

Higher oil prices may also be reflecting a geo-political risk premium that's once again starting to build because of concerns over Iran's nuclear program and tension between Iran and Israel.

Morgan Stanley warned oil prices may be "significantly higher" if tensions flared in the Middle East, sparking fears of supply disruptions

"While shut-in Iranian production is certainly not our base case, we highlight the upside risk to our price forecasts if tensions flare to the point of conflict," analysts including Hussein Allidina in New York said in a report.

The broader market is what kind of policy response may we see from OPEC or the International Energy Agency if prices remain high. IEA economist Fatih Birol said that if unrest in Africa and Gulf continues, Brent prices could spike above its all-time high of $147 a barrel very easily and this would ultimately put further strain on global economy.

"In 2011, $102 is the average price through to today which means the global economic recovery is at risk. We are in the danger zone for the global economy at current levels," he said last week.