Oil Markets Divided on Rally Continuing in Final Quarter

Oil prices recorded their best quarterly performance of the year in the third quarter, but opinion is roughly split over whether the stimulus-led rally will continue in the final three months of 2012, according to CNBC's latest oil survey.

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Though many argue new stimulus measures introduced by major global central banks last quarter were a 'game-changer,’ putting an effective floor in the oil price, others say the macro-economic environment remains soft and any post-stimulus material turnaround in the real economy – if and when it does come — will be limited.

"Economic data will continue to pull oil lower despite the stimulus efforts," said John Kilduff, partner at Again Capital LLC in New York.

Exactly half of this week's survey respondents, or seven out of 14, expect prices to climb this week. Six forecast a decline while one believes prices will be largely unchanged. A key test of confidence this week will be September's U.S. jobs report on Friday.

China's official factory purchasing managers' indexrose to 49.8 in September from 49.2 in August, the National Bureau of Statistics said on Monday. August marked the lowest reading since November 2011. Meanwhile, the Bank of Japan's tankan survey also released on Monday showed big manufacturers' business mood worsened in the three months to September.

While the jury is still out on whether stimulus efforts will revive global economic growth, fundamentals of the oil market are looking bearish because of ample crude oil inventories and an assurance from swing producer Saudi Arabia to keep markets well-supplied.

"Risk appetite seems to be fading from unsustainably high levels and fundamentals are near term bearish," said Mike Wittner, Managing Director and Head of Commodities Research - Americas at Societe Generale. Atlantic Basin light, sweet crude supplies are 750,000 barrels a day higher in October over last month. "At the same time, U.S. and European refinery runs are going down due to planned maintenance, and the Asian pull on Atlantic Basin supply stays quite low."

U.S. data late last week did seem to suggest some fatigue amongst those in the market holding bullish bets or long positions. Hedge funds and other big speculators have pulled more than $5 billion from U.S. commodity markets, cutting their net long position for the first time in six weeks after sending oil, metals and crop prices to multi-month highs, Reuters reported, citing trade data last Friday.

The profit-taking in the week to September 25 was the biggest in four months by the so-called 'money managers' in commodities, according to data issued by the Commodity Futures Trading Commission (CFTC) and calculated by Reuters.

Still, Justin Harper, Singapore-based market strategist at IG Markets noted 66 percent of clients trading oil held long positions. While new stimulus generated a bullish tone for the oil market, the possibility of more Saudi crude together with continued talk of a release of oil from the U.S. Strategic Petroleum Reserve represented two bearish themes that may "put a cap on a strong rally."

'Long Than Short'

Sean Hyman, editor of Ultimate Wealth Report, maintains the rally won't stall. "I'd rather be long than short. Even as sluggish as the economy has been, oil has been well supported. That shows a lot of relative strength in oil. Also, if Iran or Israel does anything unexpected, it could be the oil short-seller's nightmare."

Brent crude continues to be supported by lingering supply disruption concerns from the Middle East, as Israel and Iran put their case to the United Nations general assembly last week, ANZ said in a daily note today. Iran continues to claim its nuclear ambitionis for civilian purposes, while Israel said an Iranian nuclear bomb could be built by next year and action is required to prevent such a threat.

Meanwhile, Israel's foreign minister said in an interview published Sunday that international sanctions could trigger a popular uprising in Iran like last year's revolt in Egypt that toppled President Hosni Mubarak, Agence France-Presse reported.

A positive driver for the oil complex this final quarter, however, may come from the refined products market, especially reported tightness in the middle distillates group of fuels. Middle distillates are the largest category of products produced from refined crude oil and are used to fuel and power aircraft, trucks, cars and generators.

Aggregate stocks across the OECD economies and in independent facilities in Rotterdam and Singapore have fallen from a near 200 million barrel surplus in later 2009 to a 60 million barrel deficit at end-August of this year, Credit Suisse noted in a report on September 27. Put differently, Atlantic Basin inventory demand cover has dropped to a five-year low.

"Tight product markets not only limit the downside price sensitivity of broader crude oil benchmarks, but also offer trade opportunities we think, especially for middle distillates," Credit Suisse oil analysts Stefan Revielle and Jan Stuart wrote in last week's report.

A more "structural" tightness in middle distillates may not be significantly relieved until the second half of next year - if and when large supply additions come to market, the analysts said.

"Near term, that means that gasoil and heating oil futures contracts continue to offer (relative) upside potential. Granted, margins for both relative to Brent have rallied already and we're more sympathetic to buying dips at this stage but, on the whole and through winter, we suspect that good opportunities to the long side should continue to present themselves."

From a technical perspective, Dhiren Sarin, chief technical strategist, Asia-Pacific at Barclays Capital noted support held firm for both Brent and WTI crude at $106.70 and $88.90 respectively. "The risks are for a choppy sideways move to unfold (this) week though we would continue to look to buy dips against the mentioned support for a push towards $115/$118 area in Brent."

—By CNBC's Sri Jegarajah