JPMorgan Sees Oil ‘Notable Correction’ as Unrest Eases

Oil investors should consider selling existing bullish positions because prices may decline this week without fresh political tension in North Africa and the Middle East, according to JPMorgan Chase & Co.

New York crude futures surged to the highest since October 2008 on Jan. 31, with London’s Brent trading above $100 a barrel, on concern Egyptian unrest would disrupt supplies from the Middle East and unsettle the region’s stability. Signs that protests are easing mean the market may be set for a “notable correction,” the bank said in a report yesterday. Hedge funds raised bullish bets on oil by the most in eight weeks, according to the U.S. Commodity Futures Trading Commission.

“This week will be characterized by a drift down in crude prices on days where either no new tensions arise or where political progress is perceived,” JPMorgan analysts led by New York-based Lawrence Eagles said in the report. “Investors should therefore consider taking profits on all or a portion of their remaining long positions.”

Oil fell to the lowest in more than a week today as China raised key interest rates for the third time since October, spurring bets that fuel demand may be curtailed in the world’s biggest energy user. Futures for March delivery on the New York Mercantile Exchange fell as much as 1.8 percent to $85.88 a barrel while Brent crude dropped as low as $97.53.

Egypt ‘Progress’

Prices in New York slid 5 percent in the five days through yesterday as demonstrations against Egyptian President Hosni Mubarak subsided and the government met with opposition leaders.

Hedge funds and other large speculators boosted net-long positions on oil, or wagers on rising prices, by 17 percent in the seven days ended Feb. 1, CFTC data show.

U.S. President Barack Obama yesterday said Egypt is “making progress” in negotiations with the opposition. About 3.5 percent of global oil output moves through Egypt via the Suez Canal and the Suez-Mediterranean Pipeline, according to Bloomberg calculations using data from the Energy Department.

Crude may remain volatile because geopolitical risks in Algeria, Yemen and Jordan haven’t subsided, JPMorgan said. Opposition groups in Algeria, a member of the Organization of Petroleum Exporting Countries, planned protests in Algiers on Feb. 12.

“The risks of a more substantive price shock in the months ahead remain in place,” the JPMorgan analysts said. “We would look to add call option length.”

Goldman Sachs Group Inc. on Jan. 31 said Brent crude is “vulnerable” to a temporary price drop as anti-government violence won’t spread to the Middle East. Brent futures in London reached $100 a barrel that day for the first time since October 2008 and traded near $99 today.

To contact the reporter on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net

To contact the editor responsible for this story: Clyde Russell at crussell7@bloomberg.net

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