MARKET WATCH: European crisis weights down oil prices

Commodity and equity markets generally declined May 18 among global concerns over sluggish economies and the seemingly inevitable exit of Greece from the Euro-zone.

The Dow Jones Industrial Average ended last week down 3.5%, having fallen in 12 of the last 13 trading sessions in its longest losing strake since 1974, said analysts in the Houston office of Raymond James & Associates Inc.

In a weekend meeting, officials of the Group of 8 (G8, representing the economies of Canada, France, Germany, Italy, Japan, Russia, the UK, and the US) discussed means of spurring economic growth to keep Greece in the Euro-zone without abandoning austerity programs. The European Union is represented within the G8 but cannot host or chair summits. Raymond James analysts noted there are only 4 weeks until the Greek elections, and investors are concerned that country’s exit from the Euro-zone would damage other European economies.

“We are entering uncharted territory now with the Greek situation threatening to spiral out of control,” said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. “The populist left-wing Syriza party has made strides in opinion polls against the two main political parties, Pasok and New Democracy, and its leader Alexis Tsipras has said he will tear up the bailout plan if elected. Germany has told Greece sternly that it will not allow the €130 billion bailout plan, which was thrashed out in March, to be renegotiated. It seems unlikely that this is just a political bluff; the stakes on the table are already so high that it would be political suicide for German Chancellor Angela Merkel to back down.”

Meanwhile, there has been a run on Greek banks with customers withdrawing their money. “No one knows how long the Greek banking system will survive the assault, even with lashings of Emergency Liquidity Assistance from the European Central Bank, and there are worrying signs that depositors in Spain are losing their nerve,” KBC analysts reported. “Moody’s [Investors Service Inc.] has just downgraded the debt of 16 Spanish banks. One British newspaper headline read simply: $1,000,000,000,000—the estimated likely loss that would result from a Greek default. If the crisis spreads to other countries in the southern Euro-zone, the bill could be much higher.”

They noted, “The worsening Euro-zone crisis and other bad economic news have made investors run for cover, and the resulting exit from high-risk assets like oil have pulled prices sharply lower.” That in turn has reduced imports of crude into the US and other major economies with falling demand for petroleum products.

Yet speculation persists that US President Barack Obama plans another release of crude from strategic petroleum reserves to appease motorists with lower pump prices ahead of the presidential election in November. However, KBC analysts pointed out, “No US president has ever made two releases from the SPR in a single term.”

Energy prices

The June contract for benchmark US light, sweet crudes dropped $1.08 to $91.48/bbl May 18 on the New York Mercantile Exchange. The July contract fell $1.14 to $91.80/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.08 to $91.48/bbl.

Heating oil for June delivery declined 1.9¢ to $2.83/gal on NYMEX. Reformulated stock for oxygenate blending for the same month, however, gained 1.13¢ to $2.89/gal.

The June natural gas contract climbed 14.8¢ to $2.74/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.4¢ but closed essentially unchanged at a rounded $2.56/MMbtu.

In London, the July IPE contract for North Sea Brent decreased 35¢ to $107.14/bbl. Gas oil for June dropped $10.75 to $907.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.94 to $105.16/bbl. So far this year, OPEC’s basket price has averaged $116.64/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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