Oil prices have risen to three-month highs this week, notching up gains of 30 percent from lows seen in June, lifted by supply constraints, geopolitical concerns and easing worries over the European debt crisis. But the stellar gains are leading many energy strategists to question whether the rally will last.
Some say oil prices are not likely to rise much further from current elevated levels, but improving sentiment towards the global economy will keep prices supported.
"Overall there is a general sense that we have seen the worst of the economic downturn," said Mike Harrowell, Senior Resource Analyst at brokerage BBY in Sydney.
"The oil market is becoming increasingly comfortable with the economic outlook and the main driver of this is the U.S and indications that we have seen of an economic recovery," he added.
Data earlier this week showed U.S. retail sales rose 0.8 percent in July from a month earlier, marking the first rise in four months. There have also been signs of improvement in the U.S. labor market with the key non-farm payrolls report showing 163,000 jobs were added in July, beating expectations.
Harrowell said he expects Brent crude oil prices to trade in a range up to $120 over the next few months. Brent crude futures (Intercontinental Exchange Europe: lcocv1) were trading around $114.60 a barrel on Friday, while a barrel of Western Texas Intermediate (WTI) (New York Mercantile Exchange: CLCV1)traded at about $95.39 a barrel.
Worries over civil conflict in Syria, a dispute over Iran's nuclear program, production curbs in the North Sea and hopes for further fiscal stimulus globally to boost growth, have spurred gains in the oil market.
Ric Spooner, Chief Market Analyst at CMC Markets agreed that the outlook for oil prices has improved.
"A key driver has been a thawing in concerns about the crisis in Europe. We still have a long way to go, but people have become more optimistic about their assessment for growth and this has driven an improved outlook for oil," he said.
"We're pushing into a higher range in the $115-120 area, and this is where there is a larger risk to the downside," Spooner added.
Neil Atkinson, Director of Energy Research and Analysis at Data Monitor, told CNBC on Thursday that investors should not get"over-excited" about recent good numbers out of the U.S. and Brent prices should come down to the $95-$110 level.
U.S. to Step In?
In the near-term at least, the gains may be capped by signs that the U.S. is considering plans for a potential release of its oil reserves to dampen rising gasoline prices and prevent high energy costs from undermining the success of sanctions against Iran, analysts say.
"Oil prices have been going up, so the question is can the rally last?," said Nick Trevethan, Senior Commodities Strategist at ANZ Research in Singapore. "The market is starting to price in a possible release in the U.S. SPR (Strategic Petroleum Reserve) so that could weigh on oil prices in the near-term."
Some analysts, however, were skeptical that the U.S. government would tap into its strategic reserves.
"The track record of the U.S. government in tapping into the SPR has not been successful," John Licata, Chief Energy Strategist at Blue Phoenix told CNBC Asia's "Squawk Box" on Friday. "They should let the market decide where oil is going."
Trevethan added that supply issues and worries about geopolitical tensions in the Middle East should underpin oil prices, with prices for WTI rising to about $98 a barrel by the end of the year.
"We are at a point now where we see that WTI prices have a bit more upside than Brent (crude oil)," he said.
- By Dhara Ranasinghe
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