Oil hits three-week lows as Greek crisis worsens; eyes on Iran

30 Jun 2015 | Author: | No comments yet »

Crude oil futures fall more than $1 as Grexit fears mount.

“Greece, Greece, I think it’s primarily Greece,” Kyle Cooper, analyst at IAF Advisers in Houston, said. “The whole situation, the prospective default, this adds uncertainty.” Global equity markets fell sharply after Greece and its creditors failed to reach an agreement on a deal to release bailout funds in time for Greece to meet a €1.5 billion ($A2.2bn) debt payment to the International Monetary Fund due on Tuesday.

Standard & Poor’s downgraded Greece’s credit rating deeper into junk territory, saying the government’s decision to hold a referendum on the creditors’ bailout proposals brought it closer to default and an exit of the eurozone. On the ICE Futures Exchange in London, Brent oil for August delivery hit a session low of $61.36 a barrel, the weakest level since May 28, before trading at $61.85 during U.S. morning hours, down $1.42, or 2.25%. Other factors behind the drop in oil prices were worries about economic weakness in China, a big oil importer, and the prospect that nuclear negotiations between Iran and global powers could lead to a deal that lifts sanctions, paving the way for more Iranian crude to hit the oversupplied international market.

A weakened euro, which lost value against the dollar Monday, helped send crude close to monthly lows, as a stronger dollar makes it more expensive for international buyers to purchase dollar-denominated crude. Greece’s bailout is due to expire on Tuesday, the same day that Athens is due to repay €1.6 billion to the IMF, but without a rescue package in place Greece will almost certainly default.

Greek Prime Minister Alexis Tsipras abandoned negotiations with creditors on Saturday and called for a referendum to be held on July 5 on the terms proposed by lenders for extending the country’s bailout. Meanwhile, oil traders were also absorbing reports that Iran and western nations have made progress in negotiations that could put Iranian crude back into circulation, which could deepen a global crude glut that has sent prices down since last summer.

A yes vote will mean that Greeks are willing accept the latest reforms offered by creditors to Athens, while a rejection will likely lead to Greece\’s exit from the single currency union. A Greek official said Monday that banks would remain closed for six days starting on Monday to avert a crisis in the banking sector after deposit outflows accelerated over the weekend.

European stock markets sank on Monday and the yields on Italian, Spanish and Portuguese bonds spiked amid mounting fears that Greece would become the first country to exit the euro zone. A final nuclear agreement between Western powers and Iran over the country’s nuclear program is due June 30, but officials already acknowledged that talks will likely extend beyond the deadline. Analysts say Greece risked overcoming the growing rift between it and the rest of Europe when it scheduled a referendum next Monday on concessions and capital controls that its creditors want the Greek government to make to ensure its financial stability. “The crisis in Greece is weighing on the oil market even though Greece’s participation in the oil market is small,” said Andy Lipow, president of Lipow Oil Associates in Houston. “The concern is as the economy falters further in Greece, it could have a knock-on effect in other places in Europe.” In Vienna, United Nations Security Council and Iranian negotiators are getting closer to finalizing a potential deal to put constraints on Iran’s nuclear program in exchange for the lifting of three-year oil export sanctions, a European Union official said Sunday, according to Bloomberg.

According to an April 2 U.S. fact sheet on a framework for an agreement, Iran will need to cut its nuclear capacity by two-thirds, stop enriching uranium at a facility built into a mountain, swear off plutonium production and reduce its fuel stockpile by 97 percent. An Iranian nuclear deal could knock down oil prices by about $5 a barrel and make it tougher for U.S. producers to recover from the past year’s oil slump, Lipow said. In return, the country will receive sanctions relief that will let it boost oil exports and tap international financial markets. “There is always the possibility that you’ll have a sudden agreement at the last minute and that it will cause a noticeable bump down in prices,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said in a June 25 interview. Oil supply has exceeded demand globally for the past five quarters, already the most enduring glut since the 1997 Asian economic crisis, International Energy Agency data show. OPEC kept its production target at 30 million barrels a day earlier this month at a meeting in Vienna, maintaining the strategy of defending its share of the global oil market rather than prices.

Money managers reduced net-long positions in Brent, a North Sea crude benchmark used around the world, by 1.5 percent to 191,804 contracts in the period to June 23, according to data from the London-based ICE Futures Europe exchange on Monday. Output has surged as a combination of horizontal drilling and hydraulic fracturing unlocked supplies from shale formations. “Production numbers have stayed strong,” said Phil Flynn, senior market analyst for the Price Futures Group Inc. in Chicago. “Traders are thinking that maybe production in the U.S. won’t fall as quickly as people hope.”

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