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Oil price climbs ahead of crucial Greece election
June 16, 2012, Saturday
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GREECE consumes a small amount of the world's oil. But it could have a big effect on the price of crude next week.
The nation holds an election tomorrow, and Greeks could pick a government that wants to stop using the euro as its currency. That could spawn turmoil in global markets, including oil.
Why would Greece leave Europe's common currency? Greeks have been chafing under austerity measures imposed on their country in exchange for a bailout loan from European neighbors. If Greece decides to exit the euro, it could cause short-term panic. In the long-term, that could worsen Europe's financial crisis, and drag down economies in the US and China. Slowing growth hurts demand for oil.
Oil prices have already fallen 21 percent since May 1 on those fears. Traders and analysts braced themselves for more potential drama Monday, the day after the election.
"The concern is that we may be looking at not just a recession in Europe but also financial instability that could affect the rest of the world," said James Hamilton, a University of California-San Diego economics professor who studies oil prices.
Europe consumes about 17 percent of the world's oil. Greece represents about one-half of 1 percent of global use.
Hamilton, who thinks Greece is likely to leave the euro, is more concerned about the ripple effect of larger, debt-laden countries like Spain and Italy struggling. If Greece departs the eurozone, it could further drive up borrowing costs for those two nations. Spain has already sought a bailout for its banks. Italy announced steps yesterday to spur growth and lower its debt.
"The question is what's going to happen to other countries? That's really what we need to figure out at the moment," Hamilton said.
Ahead of the Greek election, the oil market was mostly calm. Benchmark US oil edged up 12 US cents yesterday to end at US$84.03 a barrel. Brent crude, which is used to make gasoline in much of the US, rose 44 US cents to US$97.61.
Even if Greeks decide to stay in the eurozone, the slow growth and debt problems in the region will remain, said Larry Goldstein, an oil expert at the Energy Policy Research Foundation.
That will make it hard for oil prices to rise no matter the outcome, because global demand is rising slowly and supplies are plentiful. "Even if you take the most positive outlook (on Greece), it still isn't pretty," he said.
Oil trader Stephen Schork said predicting the direction of prices on Monday is "useless" at this point.
"Everything is in kind of a precarious state and I think everyone is going to be kind of holding their chips ... close to the vest," he said.
With Europe's crisis already more than 2 years old, the situation could create a greater chance of a global recession, similar to what occurred when investment bank Lehman Brothers collapsed in the fall of 2008 and caused a credit crisis, Schork said.
Oil fell nearly 60 percent between September 2008 and the end of the year.
In other trading yesterday, heating oil rose 1.87 US cents to end at US$2.6465 per gallon, gasoline futures gained 2.53 US cents to US$2.7017 per gallon and natural gas fell 2.8 US cents to US$2.467 per 1,000 cubic feet.
At the pump, the national average for a gallon of gasoline fell about a penny overnight to US$3.524 per gallon, according to AAA, Wright Express and the Oil Price Information Service. That's about 20 US cents less than it was a month ago.
The nation holds an election tomorrow, and Greeks could pick a government that wants to stop using the euro as its currency. That could spawn turmoil in global markets, including oil.
Why would Greece leave Europe's common currency? Greeks have been chafing under austerity measures imposed on their country in exchange for a bailout loan from European neighbors. If Greece decides to exit the euro, it could cause short-term panic. In the long-term, that could worsen Europe's financial crisis, and drag down economies in the US and China. Slowing growth hurts demand for oil.
Oil prices have already fallen 21 percent since May 1 on those fears. Traders and analysts braced themselves for more potential drama Monday, the day after the election.
"The concern is that we may be looking at not just a recession in Europe but also financial instability that could affect the rest of the world," said James Hamilton, a University of California-San Diego economics professor who studies oil prices.
Europe consumes about 17 percent of the world's oil. Greece represents about one-half of 1 percent of global use.
Hamilton, who thinks Greece is likely to leave the euro, is more concerned about the ripple effect of larger, debt-laden countries like Spain and Italy struggling. If Greece departs the eurozone, it could further drive up borrowing costs for those two nations. Spain has already sought a bailout for its banks. Italy announced steps yesterday to spur growth and lower its debt.
"The question is what's going to happen to other countries? That's really what we need to figure out at the moment," Hamilton said.
Ahead of the Greek election, the oil market was mostly calm. Benchmark US oil edged up 12 US cents yesterday to end at US$84.03 a barrel. Brent crude, which is used to make gasoline in much of the US, rose 44 US cents to US$97.61.
Even if Greeks decide to stay in the eurozone, the slow growth and debt problems in the region will remain, said Larry Goldstein, an oil expert at the Energy Policy Research Foundation.
That will make it hard for oil prices to rise no matter the outcome, because global demand is rising slowly and supplies are plentiful. "Even if you take the most positive outlook (on Greece), it still isn't pretty," he said.
Oil trader Stephen Schork said predicting the direction of prices on Monday is "useless" at this point.
"Everything is in kind of a precarious state and I think everyone is going to be kind of holding their chips ... close to the vest," he said.
With Europe's crisis already more than 2 years old, the situation could create a greater chance of a global recession, similar to what occurred when investment bank Lehman Brothers collapsed in the fall of 2008 and caused a credit crisis, Schork said.
Oil fell nearly 60 percent between September 2008 and the end of the year.
In other trading yesterday, heating oil rose 1.87 US cents to end at US$2.6465 per gallon, gasoline futures gained 2.53 US cents to US$2.7017 per gallon and natural gas fell 2.8 US cents to US$2.467 per 1,000 cubic feet.
At the pump, the national average for a gallon of gasoline fell about a penny overnight to US$3.524 per gallon, according to AAA, Wright Express and the Oil Price Information Service. That's about 20 US cents less than it was a month ago.
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