Weakness in Oil Prices Limited, Buy on Dips: Experts

Oil prices may climb this week, boosted by continued tensions in the Middle East, while the stimulus measures announced by major global central banks will limit any short term correction caused by downbeat data, CNBC's weekly oil sentiment survey showed.

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Eight out of 13 respondents, or about 62 percent, expect prices to climb this week after oil rose for the second straight session on Friday, recovering from a 7 percent slide earlier in the week. The remainder, 38 percent, or five out of 13 respondents, forecast a decline.

The long-term impact and expectations about the increased political risk may keep any downwards correction short lived, said Johannes Benigni, managing director of JBC Energy. “Therefore I rather see this as a dip and buying opportunity,” he said.

Despite the loss of faithdisplayed starkly by the oil markets just days after the announcement of the third round of quantitative easing (QE3) by the U.S. Federal Reserve, some believe recent stimulus announcements from major central banks will help to put a firm floor on prices.

“How can oil go down all that far with stimulus out of the European Central Bank, China, the Fed and now Japan? The answer ... it can’t,” said Sean Hyman, editor of Ultimate Wealth Report. “Stimulus creates inflation which is supportive of oil trending higher. So buy all dips.”

ANZ noted a number of positive trading themes that emerged on Friday which may set the tone for this week.

Technical short-covering buoyed energy prices on Friday, the bank said, “with some market participants' uncomfortable holding shorts ahead of the weekend given the recent turmoil in the Middle East.”

Iran could launch a pre-emptive strike on Israel if it was sure the Jewish state was preparing to attack it, a senior commander of its elite Revolutionary Guards was quoted as saying on Sunday, Reuters reported. Meanwhile, the U.K., France, and Germany have officially called for new European Union sanctions against Iran over its nuclear program, diplomats said Sunday, according to AFP. Globally, protests deepened against an anti-Islam film.

Buy the Dips

Concerns over production outages in Libya and the North Sea also supported sentiment towards the end of last week, ANZ noted. U.S. futures data showed a 7 percent increase in noncommercial net oil long positions to 267 million barrels, implying bullish price sentiment for the week ended Sept. 18, despite a sharp 2.5 percent drop in U.S. oil prices last Monday and 6.2 percent decline for the week, according to a research note from the bank.

Brent crude topped $111 a barrel, but posted a 4.5 percent drop for the week ended Sept. 21 due to a three-day rout that sent it plunging from $116 to $108. U.S. oil futures ended down 6.2 percent for the week.

"The breakdown below $111.55 in Brent triggered a selloff to flush out the 'late to the party' longs," said Dhiren Sarin, chief technical strategist, Asia-Pacific at Barclays Capital. "However, we view the pullback as corrective and would be looking to buy dips at $106.65 and, in the worst case, $104 area for a move back towards $118/120 in the coming weeks."

Weakness in U.S. dollar and equities is "holding up" and will underpin any rebound, Sarin added: "If these markets start to deteriorate it would certainly challenge the oil outlook."

The focus will return to the fundamentals of the global economy with scheduled U.S. data releases this week including August durable goods order, new homes sales and final second-quarter GDP. Markets will be looking for any sign of recovery momentum in the U.S. economy though it may be still too early in the cycle to see any material turnaround post-QE3.

"For equity prices (and risk assets in general) to migrate higher in the December quarter markets will need to start seeing improved economic fundamentals," wrote George Boubouras, executive director and head of investment strategy and consulting at UBS Wealth Management Australia in a weekly investment strategy note on Sunday. “There is enough stimulus globally to help drive the broader economic gains that policy makers are targeting. It comes down to confidence. This ultimately drives investments and future earnings.”

Respondents with bearish calls on prices this week point to negative market fundamentals namely high U.S. inventories, an overall weak global macro picture and low demand.

U.S. crude oil stockpiles rose by a sharp 8.5 million barrels last week, the largest weekly gain since March, as imports surged, government data showed last Wednesday. With Tropical Storm Isaac “now history, clearly the key to this report was the huge rebound in crude stocks, along with weak U.S. product demand,” said Societe Generale’s Mike Wittner.

Compass Global Markets added: “Investors cannot escape fundamentals. We went short at $98 (U.S. crude futures) just before the Federal Reserve QE3 announcement. We maintain this position and target $86.00 as a level to initially take profit.”

SPR Talk

If the bulls are right and prices rise this week, the move higher may re-ignite talk of Washington releasing oil from Strategic Petroleum Reserves (SPR) to take the pressure of consumers.

But even if such a move were to occur, there is doubt whether the resulting lower energy prices would last for long. Meanwhile, Saudi Arabia made its powerful presence felt in the global markets last week when a senior Gulf source said the Kingdom is working to lower oil prices, Reuters reported. Many are also questioning how long the impact of those comments, as a negative price factor, will last.

“We heard countless rumors this week of the U.S. tapping the SPR. However, maybe we should look at what transpired a bit differently,” said John Licata, chief energy strategist for Blue Phoenix, an independent energy research and consulting company. “Politics or not, the U.S. did tap the SPR this week — the acronym could also stand for ‘Saudi Price Reversal.’ I very much still believe the sharp decline in prices is temporary, just like any real SPR move would bring to the marketplace.”

—By CNBC’s Sri Jegarajah