Oil Prices in 'Holding Pattern' as Market Ponders US Data

Benchmark U.S. crude futures will likely remain unchanged around $103 a barrel as investors debate whether Friday's sub-par payrolls data builds the case for more stimulus from the Federal Reserve, CNBC's weekly survey of market sentiment showed.

Traders work in the crude oil options pit at the New York Mercantile Exchange.
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Traders work in the crude oil options pit at the New York Mercantile Exchange.

Cyclical commodity markets will also be watching first-quarter gross domestic product data from China, the world's second-largest economy, scheduled for Friday. China's annual inflation rebounded sharply in March to 3.6 percent, driven by rising food prices, data showed on Monday, surprising investors who had bet on cooling price pressures to give Beijing room to ease monetary policy.

Exactly fifty percent, or five out of ten respondents, polled in a weekly CNBC poll of analysts and traders, expect oil prices to remain steady this week. U.S. crude futures will be in a "holding pattern" between $103-$107, said Peter McGuire, CEO of FX Global Capital, who has a 'neutral' call on prices this week. Meanwhile, three respondents believe prices will fall, suggesting a short-term bias towards lower prices, while two expect a rise.

"Economic data will likely continue to be mixed with most of the upside already priced in," said Kirk Howell, Chief Operating Officer, of SunGard's energy and commodities business SunGard Kiodex. "Without any significant events out of the Middle East and no change in stance from the Fed, the greater risk continues to be to the downside in the short term."

U.S. light, sweet crude fell more than $1 in early Asian trade on Monday, reversing most of the gains made on Thursday, after data on Friday showed the U.S. economy created 120,000 jobs last month, disappointing market expectations for an increase of 200,000. Front-month London Brent crude was down $1.17 a barrel to $122.26 a barrel by 2240 GMT, after slipping as low as $122.17. It had settled at $123.43 per barrel, up $1.09, on Thursday. U.S. oil traded $1.14 a barrel lower at $102.17 by 2231 GMT, after slipping as low as $102.03. The benchmark settled at $103.31 a barrel on Thursday, gaining $1.84. Oil markets were closed on Friday due to Good Friday.

Both Brent and U.S. crude futures "appear to be locked in corrective patterns," said Dhiren Sarin, Barclays Capital's Chief Technical Strategist for Asia-Pacific. "For the time being we expect further choppy moves and are neutral, though the bullish triggers are clear: $107.10/50 area in WTI and $127.10 in Brent; a break above these levels, especially on a closing basis would turn us bullish in line with our medium term outlook."

Technically, Tom Weber at Los Angeles-based Portfolio Managers, said oil prices could test the $100 a barrel level soon. If $100 holds, then prices may move back to back towards $105, Weber said. "If it breaks, we look for targets in the $96 area," he said, adding lingering fundamental questions for oil markets remained. Amongst them: "China: hard landing or not? U.S.: Recovery or not? Europe: Spain debt contagion or not?"

On the supply side, oil market bears highlight ample U.S. stockpiles as a reason for weaker prices. The U.S. government said last Wednesday the closely watched amount of crude in storage rose by 16.1 million barrels over the past two weeks, the biggest increase in absolute terms since March 2001.

Commercial tanks held 362.4 million barrels of crude in the week before last, a level far above average, the U.S. Department of Energy reported, according to the Financial Times.

Societe Generale oil analysts described the stockbuild as "strongly bearish" with increases driven by higher supply taking stocks overall above five-year highs.

Meanwhile, the United States, Britain, France, and possibly, Japan, are considering releasing some of their strategic petroleum reserve to try and tame high prices at the pump that have caused economic pain and protests around the world, Reuters reported.

"A near-term release from the SPR could amplify a short term fall in prices but the impact would likely be fleeting, similar to past releases in 2005 in response to Hurricane Katrina and in 2011 to make up supply lost from Libya," said SunGard Kiodex's Kirk Howell. "Each of these actions was followed by around a $10 drop but prices had recovered by two months later as a result of other more important drivers. As to the size of release, it would likely be in excess of 30 million barrels."

Excel Futures' Mark Waggoner said a release of SPR oil is "unlikely" unless crude breaches $110 a barrel. "If released, (the additional SPR will offer) only a few days of relief at best.

More importantly, Waggoner noted inventories could continue to build as imports into the U.S. rise. Saudi Arabia's state oil tanker company Vela has booked at least four vessels carrying up to 8 million barrels of crude for the U.S. Gulf in the past two days, tanker fixture data showed last Thursday, Reuters reported. A further three tankers are scheduled to arrive in the U.S. Gulf around the end of April, ship tracking data showed.

Saudi Arabia ramped up shipments to the United States, the world's biggest oil consumer — which has seen its economy threatened by rising fuel prices — by 25 percent in the first quarter of this year to the highest level since mid-2008, Reuters reported.

"VLCCs (Very Large Crude Carrier) on way to U.S. should have a major impact as we build 20 million barrels in next few weeks," Waggoner said, adding that U.S. futures could slip this week to as low as $98.00.

The possible release of strategic reserves and rising U.S. crude inventories along with "the market reduction in the probability of QE3, a strengthening U.S. dollar... demand destruction brought on by rising U.S. gasoline prices and ongoing talk of a China slowdown and stagnation in Europe," were key bearish themes last week, said Shelley Goldberg, Director, Global Resources & Commodities Strategy at Roubini Global Economics.

Nevertheless, Goldberg is bullish oil this week. "It appears that markets are taking a breather," she said. "Yet the upside is that the world, net/net, is still tightly supply, faced with outages in Syria, South Sudan and Yemen. Iran my play for time, which means the fear premium will persist and be a recurrent threat. Any military action by the U.S., while not advocated by Obama, is not off the table but the decision becomes more muddied as the presidential election approaches."

The United States and its allies are pressing for an end to Iran's high-level uranium enrichment and the closure of a facility built deep under a mountain as talks on Tehran's nuclear standoff with the West resume this week.

Iranian media and Western officials said the talks, which collapsed more than a year ago, would begin on Saturday in Istanbul, Reuters reported.

"Any significant news or rumor out of this meeting could move oil," said SunGard Kiodex's Kirk Howell.