DW: Why ‘Grexit’ worries weigh down oil price

The following commentary on oil price declines linked to worries over Greece’s financial situation came as Douglas Westwood’s DW Monday by Matt Loffman.


(Shutterstock/esfera)

As strained negotiations between the Greek government and European financial ministers enter the end-game, the impact on energy markets remains uncertain. 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. The concern for oil markets centers around two factors: the consequences for economic stability and growth in Europe, and strengthening of the US dollar.

Greece herself consumes less than 0.4% of global crude, produces fewer than 9,000 barrels per day and had an economy of $240bn last year – around 0.3% 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% and 5% is possible. While this picture remains highly uncertain, historical linkage of oil consumption and GDP growth would imply a potential reduction of 360 kboe/d 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% 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.

 

 

Did You Like this Article? Get All the Energy Industry News Delivered to Your Inbox

Subscribe to an email newsletter today at no cost and receive the latest news and information.

 Subscribe Now

Whitepapers

The Time is Right for Optimum Reliability: Capital-Intensive Industries and Asset Performance Management

Imagine a plant that is no longer at risk of a random shutdown. Imagine not worrying about losing...

Going Digital: The New Normal in Oil & Gas

In this whitepaper you will learn how Keystone Engineering, ONGC, and Saipem are using software t...

Maximizing Operational Excellence

In a recent survey conducted by PennEnergy Research, 70% of surveyed energy industry professional...

Leveraging the Power of Information in the Energy Industry

Information Governance is about more than compliance. It’s about using your information to drive ...