MARKET WATCH: Proposed Greek referendum undermines commodity, equity prices

Oil prices slipped lower Oct. 31 and were reported to be “crushed” along with equity prices in early trading Nov. 1 after the prime minister of Greece unexpectedly announced a referendum early next year on the austerity programs demanded under the Euro-zone plan to rescue that financially troubled country.

Greek opposition to austerity programs previously prompted violent protests in Athens. Austerity measures therefore are likely to be rejected in what will be the first referendum in Greece since 1974.

Intense sell-offs were reported in European markets along with a dramatic jump in value of the US dollar. A stronger dollar usually means lower oil prices.

The Greek government's surprise move “has caused European politicians to weigh whether or not to ‘divorce’ Greece entirely,” said analysts in the Houston office of Raymond James & Associates Inc. “Yesterday, concerns about the plan to fend off Europe's debt crisis ‘spooked’ the market.” Yet they said, “October was still an historic month for the Dow Jones Industrial Average, as the index closed up 9.5%, the third largest monthly gain in 115 years.”

In New York market, Raymond James analysts said, “The commodities fared better than the Dow yesterday, as crude retreated 0.7% and natural gas ended the day up a penny, or 0.3%. This morning, futures appear to be getting crushed, with the Dow and commodities trading down on more Euro-zone uncertainty.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The doom and gloom matrix is not improving.” He noted, “The Euro-zone unemployment report for September has climbed to a record 10.2%, and the trend is a rising one. In Spain 48% of the under-25-year-olds are unemployed; in Greece, 43.5%. The euro has fully reversed the gains made last week after the ‘EU deal’ and was being sold quite aggressively overnight.”

The Greek prime minister’s announcement may force banks to take a bigger write-down on Greece bonds. “The haircut in July was at 21%; in October it rose to 50%; and we need to consider the risk reality that it rises to 100% in early 2012,” Jakob said.

He said, “All of the financial engineering solutions that are being set-up are dependent on France maintaining its AAA credit rating, but that remains a big assumption. When France is pushing to make lowering ratings illegal, as a risk manager you need to have all the warning lights flashing about financial optimism build on a leveraged instrument that is fully dependent on ratings not being lowered. The US has its own problems, but we’d rather be in dollars and having our fate in the hands of the US president than being in euros and having our fate in the hands of the street of Athens.”

In other, news, the official Chinese Purchasing Managers Index (PMI) for October was down to 50.4, the lowest level since February 2009. “But the Chinese PMI in February 2009 was in a rising trend while it is currently in a falling trend. In a falling trend, the Chinese PMI is at the lowest level since July 2008,” Jakob said.

Energy prices

The December contract for benchmark US sweet, light crudes lost 13¢ to $93.19/bbl Oct. 31 on the New York Mercantile Exchange. The January contract was reduced 16¢ to $93.08/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 13¢ to $93.19/bbl.

Heating oil for November delivery declined 1.63¢ to $3.04/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 3.93¢ to $2.64/gal.

The December natural gas contract increased 1.1¢ to $3.93/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 1¢ to $3.63/MMbtu.

In London, the December IPE contract for North Sea Brent retreated 35¢ to $109.56/bbl. Gas oil for November fell $11.75 to $950.50/tonne.

The OPEC Secretariat was closed Nov. 1, so the average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was not available.

Contact Sam Fletcher at samf@ogjonline.com.

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