Benchmark crude oil prices will likely extend their losses this week as investors questioned whether the recent rally which sent Brent crude to a multi-year high is warranted by the fundamentals, CNBC's weekly survey showed.
Sandy Jadeja, Chief Technical Analyst at City Index said the weekly chart for U.S. crude futures has created a potential reversal signal. "A break below $105.70 "would suggest a pullback towards the $100 level may be on the cards," Jadeja said. "Nymex will need to clear $110.30 to negate the bearish view and reach for $115 - $117."
Ten out of 14 respondents expect prices to fall this week while the remaining four expect prices to rise. Balance of opinion in last week's survey called for prices to rise but the bulls were wrong-footed by the pullback in Brent , which fell 2 percent for the week after five straight weekly gains, while its U.S. counterpart fell 2.8 percent, snapping a string of three higher weekly finishes.
"Fear and speculation" drove the gains in Brent crude last week to its highest level since July 2008, said Jonathan Barratt, CEO, of commodities newsletter Barratt's Bulletin. "We see the Middle Eastern premium being built in plus speculators looking to actually take advantage of it." Barratt told CNBC Asia last week. Though U.S. crude inventories continue to build "we're not seeing that flowing through in terms of fundamentals really pushing the price," he explained.
Tom James, Chairman & Co-Founder at Navitas Resources said oil prices were "overheated" and needed to come down. However, James recommended buying the dip into $110-$105 area basis Brent.
Key macro risk events for leading economic indicators like copper and crude oil this week include U.S. non-farm payrolls data for February. Forecasts are calling for an addition of about 210,000 jobs for February after the previous month's gain of 243,000. But sub-par China fixed-asset investment, industrial production and retail sales this Friday -- suggesting slower growth in the world's second-largest economy -- may undermine a positive U.S. jobs report.
Although oil prices are cooling, global energy markets remain edgy and highly vulnerable to negative headlines from the Middle East highlighting supply disruptions. Last Thursday was a classic example. Brent crude jumped above $128 a barrel, reacting to an Iranian media report of a pipeline fire in Saudi Arabia. Prices fell equally hard and as fast after Saudi Arabia reassured markets on Friday that there had been no explosion.
"If we can see a pop of a couple of dollars in a few minutes just on the back of one random news story without confirmation, just think what it might do if something real actually happened," said Rebecca Patterson, Chief Markets Strategist JPMorgan Asset Management, responding to the price spike on Thursday.
The fact that oil prices hit higher levels than those seen during last year's Arab spring suggests "that the market is still very sensitive to what's happening in the Middle East and that maybe there isn't as much risk premium priced in oil as we expected," Patterson added.
Amongst the few bulls in this week's survey, David Kotok, Chairman & Chief Investment Officer of Cumberland Advisors said profit taking would be limited. "The major trend is still up" because of the tensions surrounding Iran's nuclear ambitions and widening sanctions against Tehran.
Oil-price shocks have a common theme, Kotok said in recent commentary: "There is a strongman. There is a shooting war or a threat of a shooting war. Diplomacy and sanctions and negotiation have failed. The final few days leading to the spike and the shock are impossible to forecast in advance."
Kotok added: "History also shows that oil prices have an upward trend during the period leading to the final spike. In every case, the peak in price only came after something was seen as a terminal event or final action. Subsequently, prices plummeted."
From a sector perspective, Kotok said Cumberland is overweight oil and energy in their ETF portfolios. "Energy stocks are now about one-eighth of the total market value, if you use the S&P 500 index as your guide. At the peak of the oil shock in 1980, the energy component of the stock market was close to 25 percent of total market value. Long-run forecasts with economic models argue for oil to be $175-200 per barrel by the end of this decade."
Oil traders will be watching domestic politics in Iran for any implications on foreign policy. Clerical Supreme Leader Ayatollah Ali Khamenei has tightened his grip on Iran's faction-ridden politics after loyalists won over 75 percent of seats in parliamentary elections at the expense of President Mahmoud Ahmadinejad, a near-complete count showed, Reuters reported on Sunday.
"If the elections prove to be difficult for the President and highlights a real undermining of his support then he will come out all verbal guns blazing at the West over the next few weeks and the risk on trade will be back with a vengeance," warned Aiden Bradley, Managing Director and head of Pan-Asian Oil & Gas at RBS.
"Recent events (the refusal to allow weapons inspectors into a single identified military site) would seem to suggest provoking Israel or the U.S. into striking the nuclear facilities is perhaps already a Presidential 'policy' decision."
Should the retreat in oil prices prove shot-lived and a positive trend reasserts itself, will higher energy costs derail the fragile economic recovery, particularly for the consumer, or can the global economy absorb high oil prices?
Many believe it's the pace of the ascent that matters. A disorderly move higher against a backdrop of tensions in the Middle East is the worst outcome, argues JPMorgan Asset management's Rebecca Patterson.
"It's not so much the level but the speed of the move and actually in the case of the United States the time of year of the move," Patterson said. "We're seeing real economic improvement - that is a great reason for oil to rise. If that's helping push up oil, I don't think you need to worry as much about equities."
But if supply shocks alone are pushing oil up, especially if it occurs around May or early June with the U.S. summer driving season, "then you definitely want to be paring back on some of your cyclical assets especially the consumer discretionary stocks," Patterson explained.
The nationwide average for gasoline prices rose for the 26th straight day last Sunday, topping the $3.76-a-gallon mark, according to the motorist group AAA.
The average price of regular unleaded gasoline climbed 0.7 cent in the latest 24-hour period. The price of gas is up from $3.47 a month ago and $3.69 a week ago. Last year at this time, gas was $3.49 a gallon. Prices are within a nickel of the $4 mark in Connecticut, New York and Oregon, according to AAA.