Euro and oil: A Greek vacation from fear for the summer?
Traders work on the floor of the New York Stock Exchange, 18 June 2012. | SPENCER PLATT/GETTY IMAGES/AFP
On 18 June, oil prices fell towards $96 a barrel, erasing early gains after a vote in Greece favouring a pro-European government failed to ease concerns about the Eurozone.
A Greek parliamentary election on 17 June handed victory to centre-right party New Democracy that supports a pro-bailout programme and Greece staying in the euro. That had eased fears that the country will leave the currency union and sink the world economy deeper into recession. But there is the possibility that other larger economies such as Italy and Spain may also need to be rescued, threatening the Eurozone.
Asked if the outcome of the Greek election would affect the oil price, Justin Urquhart Stewart, Director of Seven Investment Management in London, told New Europe on 17 June there other issues affecting the oil price at the moment like whether the Saudis are going to boost production further. “But at the moment there is going to be further weakness on that I would have thought because until you can see confidence coming back in terms where demand comes from that oil price is still going to remain weak,” Urquhart Stewart said.
A Greek parliamentary election on 17 June handed victory to centre-right party New Democracy that supports a pro-bailout programme and Greece staying in the euro. That had eased fears that the country will leave the currency union and sink the world economy deeper into recession. But there is the possibility that other larger economies such as Italy and Spain may also need to be rescued, threatening the Eurozone.
Asked if the outcome of the Greek election would affect the oil price, Justin Urquhart Stewart, Director of Seven Investment Management in London, told New Europe on 17 June there other issues affecting the oil price at the moment like whether the Saudis are going to boost production further. “But at the moment there is going to be further weakness on that I would have thought because until you can see confidence coming back in terms where demand comes from that oil price is still going to remain weak,” Urquhart Stewart said.
Meanwhile, Chris Weafer, chief strategist at Troika Dialogue in Moscow, wrote in a note to investors on 18 June that the next steps in Greece will be crucial. “The outcome of the Greek election and optimism that the US Federal Reserve, along with other major Central Banks, may be close to adding fresh growth stimulus will provide the backdrop to global markets this week,” he wrote. “The stakes are clear. The equation surrounding the analysis of the Greek election is very straight forward; if the new government does now commit to the terms of the bailout and to staying in the euro, then last week’s global market relief rally will be greatly extended and we may see the hoped-for strong rally in all risk assets into end June. If, on the other hand, the new government wants to renegotiate, something that has been rejected by Germany, then last week’s optimism will quickly fade,” Weafer wrote. “In football terms, this high-stakes game is deep into the added injury time. Either way, this is by no means the end of the matter. A further crisis is inevitable until major structural reforms are agreed to support the region’s banks and economies. With luck, however, global markets may get a vacation from fear for the summer. Most investors will settle for a positive run through to end June,” he added.
On 18 June, leaders at a Group of 20 will be under pressure to produce a lasting solution to a debt crisis at a two-day meeting in Mexico.
Brent crude were down $1.34 cents at $96.27 a barrel at 0825 EDT, sliding from a one-week high of $99.50 a barrel hit early in the session. US oil futures were down $1.31 cents at $82.72 a barrel, off a one-week high of $85.60 a barrel hit in early trade.
On 18 June, a meeting between Iran and world powers in Moscow is unlikely to produce a swift resolution to a dispute over Iran's nuclear programme, nor prevent an embargo on Iranian oil from taking effect on 1 July. “Iran talks will have a near-term impact. The unknown factor is how traders may react to the message from the Iran-UN nuclear talks, taking place in Moscow [18 June], and also should there be any escalation in protests in Egypt following the court ruling that dissolves the Muslim Brotherhood parliament. A clash between the military and the Muslim Brotherhood is unlikely but not impossible. While Egypt is not an oil exporter, any return to instability in the country will lead to worries about contagion across the region,” Weafer wrote.
Tehran also wants relief from intensifying economic sanctions, and faces new US and EU sanctions in the next two weeks.
“The oil market is currently evenly balanced between the factors that are more likely to drive the price lower and the risk factors that can sustain it around current levels over the short term. Regardless of the short-term factors, which were added to over the weekend with news of the death of the Saudi Arabian interior minister and crown prince, there now appears to be greater coordination between the Saudis and the US, which should lead to Brent at $90 per oil barrel, rather than much above $100 per oil barrel in the coming weeks,” Weafer wrote.
For now, crude markets seem ready to cope with any loss of Iranian oil. It also came as no surprise that the Organization of Petroleum Exporting Countries (OPEC) retained the previous production quota at its meeting on 14 June. Saudi Arabia can live with $90 per oil barrel Brent through the second half of 2012, Weafer wrote. “Oil is heavily influenced by the expectations for global economic growth, so any move by the Fed or through some G-20 coordination will provide a positive knee-jerk boost to all risk assets, including oil. But that is likely to be very short-lived, as Saudi Arabia appears very intent on keeping the average price for Brent for this year at no more than $100 per oil barrel,” Weafer wrote. He noted that Riyadh is reported to have built up crude inventories that it can release either in the event of concerns over Iran or simply to keep the price heading toward $90 per barrel, he wrote.
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