Saturday 13 July 2024

Europe’s economic health and the US dollar
are key to maintaining oil prices.

Why ‘Grexit’ worries weigh down oil price

LONDON, July 13, 2015

As strained negotiations between the Greek government and European financial ministers enter the end-game, the impact on energy markets remains uncertain, a report said.

Setting aside both the deeply troubling social impact for Greek citizens and other major forces – from Chinese equities to an Iranian nuclear deal – the threat of Greece leaving the Euro is already dampening crude prices, added an analysis by Douglas-Westwood Houston, a London-based provider of market research and consulting services to the energy industry worldwide.

The concern for oil markets centers around two factors: the consequences for economic stability and growth in Europe, and strengthening of the US dollar, the report highlighted.

Greece herself consumes less than 0.4 per cent of global crude, produces fewer than 9,000 barrels per day and had an economy of $240 billion last year – around 0.3 per cent of the global total.

An exit from the Euro, however, threatens the breakup of the Eurozone itself, a major global economy and consumer of 9.7 million barrels of oil per day. Should Greece ‘walk away’ from her debts, exposure to the debt in other member states, coupled with premiums for borrowing (particularly in Southern Europe) could be expected to usher in another period of recession.

Estimates from the IMF suggest a contraction of between 2 per cent and 5 per cent is possible. While this picture remains highly uncertain, historical linkage of oil consumption and GDP growth would imply a potential reduction of 360 kboe/day (thousand barrels of oil equivalent/day) per year in consumption. Tiny indeed, but in an over-supplied market, every portion of demand is important.

 Ever-deeper uncertainty within Eurozone economies however, is likely to increase the flight of capital to dollar-based equities, The Euro has already fallen 18 per cent against the dollar in the past 12 months and a Greek exit would likely dampen this significantly as investors look nervously at other debt-laden Euro members. A strong dollar weakens international oil demand as the commodity, traded in USD, is more expensive on a relative basis.

If ‘Grexit’ becomes a reality it will serve to further dampen the recovery in oil price – It will be interesting to see the impact of the weekend’s ‘In-Out’  meetings in Athens and Brussels on oil prices in the week ahead. – TradeArabia News Service

Tags: euro | Dollar | oil price |

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