Debt pressures in Europe enhance the importance of low-profile meetings held Nov. 22-23 in London on interactions between physical and financial markets in energy.
After Ireland in November joined Greece in seeking international rescue from unmanageable debt, contagion fear engulfed the eurozone. At this writing, investors were unloading bonds from Spain and Portugal. Questions loomed about adequacy of a $1 trillion cushion established earlier in the year by the European Union and International Monetary Fund. Analysts wondered about levels of commitment by solvent European countries.
The prospect of a euro weakened further against the dollar has implications for the price of oil. Since the financial collapse that began in the US in 2007, oil prices have reacted as much to developments in financial markets as to those in physical markets for crude oil and oil products.
Oil prices lately have reflected the interplay between the value of the dollar, commodity price indexes, equity values, and—oh, yes—assessments of production, consumption, and physical manifestations of supply-demand relationships such as inventories and unused production capacity.
Oil’s value has always been linked to the value of the currency under which it trades. What’s new is trading of dollars against oil, and other financial instruments related to the corresponding values, in volume sufficient to make links seem instantaneous—at least some of the time.
To examine new complexity in energy-market dynamics, the International Energy Agency, International Energy Forum, and Organization of Petroleum Exporting Countries held the London sessions, which a press release described as “high-level technical meetings.”
First-day subjects included the evolution of physical and energy-related financial markets, “over-the-counter” trading and its effect on price discovery and volatility, and relationship between oil products and paper markets. Second-day discussions focused on regulation of commodity and derivatives markets and included the possibility for international coordination of regulatory efforts.
News organizations couldn’t cover the proceedings. Participating organizations will report findings at an IEF ministerial meeting next February in Riyadh.
Until then, watch the euro.
(Online Nov. 28, 2010; author’s e-mail: email@example.com)