We had warned over the past few weeks that there was an outside chance that the Greek crisis would infect oil markets, and over the weekend Greek voters ensured that it did. With an overwhelming “no” vote, just about every corner of Greece voted against Europe’s debt package. Exactly what Greeks were voting for was rather confusing, but the vote was taken as a robust vote of confidence in Prime Minister Alexis Tsipras’ hardline approach against Greece’s creditors.
While that handed Tsipras a strong victory, it also led to a plunge in oil prices. WTI fell by 8 percent on July 6, falling to around $53 per barrel. Brent lost nearly 5 percent, dropping to under $58 per barrel. Oil is now trading at its lowest level in months, erasing several weeks of stability as well as optimism that the market had begun the arduous process of adjustment.
The Greek crisis has entered a new and much more dangerous phase, raising the possibility that the country could get booted from the currency union. JP Morgan Chase stated that it thinks odds are more likely than not that Greece leaves the euro. With Europe in turmoil, oil prices may not recover in the short-term. Related: Don’t Panic, Nothing Has Really Changed In The Oil Markets
But it isn’t just Greece. In another (much more positive) geopolitical development, the Iranian negotiations are at the finish line. The outcome is still in doubt, as the deadline has once again been pushed back, this time until July 10, but all sides are extremely close to a deal. After weeks and months of uncertainty, the progress over the past week seems to have finally convinced the oil markets that a return of Iranian oil is close to becoming a reality. As we have said numerous times, the extent to which Iran can bring oil fields online and ramp up exports is a matter of much debate. But realistically Iran could send half a million to a million barrels of oil per day to the global marketplace within the next year.
Over the past two weeks we have also closely watched the plunge in China’s stock market. After having failed to stop the hemorrhaging, China’s central government rolled out fresh measures over the weekend to prop up its key stock exchanges. Through a complex arrangement with the stock exchanges, the central bank will back the purchase of 120 billion yuan ($19.3 billion) worth of shares to prevent a full blown meltdown. Also, an estimated 28 companies that had planned initial public offerings will suspend those plans. The Shanghai Composite steadied on July 6, but China is not yet in the clear. A market meltdown in the world’s largest oil importer would send oil prices spiraling downward.
The perfect storm of events is battering oil prices. The rout is on, volatility has returned, and all bets are off. Some analysts even raise the possibility that oil prices could flirt with the lows of earlier this year (low $40s for WTI). Related: Exposing The Hypocrisy Of Wall Street
The crash in oil prices probably pushed Canada into recession earlier this year, a new assessment from Toronto-Dominion Bank says. Canada’s GDP contracted by 1 percent in the first quarter on an annualized basis, and likely 0.6 percent in the second quarter. That could lead to a cut in interest rates from the central bank, which could weaken the currency and provide a bit of a boost to the economy. Oil represents the country’s most important export, so the collapse in oil prices caused a shock to the economy. Canada’s oil industry could slash capital expenditures by 18.7 percent this year.
Murphy Oil (NYSE: MUR) was forced to shut down 33 heavy oil wells in Alberta after regulators discovered that the company was not capturing fugitive gasses. Alberta inspectors did a sweep of at least 71 sites in the province’s Peace River region, and the number of wells that it found out of compliance are the highest to date. It will conduct a further investigation into Murphy Oil.
Low oil prices will continue to drag on the oil service sector. Technip (EPA:TEC), a French builder of equipment for oil drilling, announced plans to eliminate 6,000 jobs amid the oil price downturn. That amounts to about 16 percent of its entire workforce. The move could save nearly $1 billion over the next two and a half years. Technip’s struggles are emblematic of ongoing distress in the services sector. Related: Is Russia Ready To Make A Comeback?
Moreover, market watcher Susquehanna says that the recovery for offshore rig drillers is “further off than expected.” The collapse in oil prices led to a cut back in offshore drilling, which in turn forced older rigs to be cold stacked. As these rigs were removed from operation, it was thought that the glut of rigs would ease. But with newer rigs under construction set to come into operation, “the industry could experience a more protracted downturn than previously anticipated,” Susquehanna finds. That is bad news for drillers Transocean (NYSE: RIG), Diamond Offshore Drilling (NYSE: DO), Atwood Oceanics (NYSE: ATW), Rowan (NYSE: RDC), and Noble (NYSE: NE).
Four drillers withdrew themselves from Mexico’s upcoming auction on its offshore oil tracts. Mexico passed a historic energy reform package that opened up its oil and gas reserves for international investment for the first time in seven decades. The so-called “Round One” auction is set to take place this month. But Reuters reported that four firms – Noble Energy, Glencore, Ecopetrol, and PTT Exploration and Production Public Company Limited – pulled out. While no explanation was given, it could be a sign of both the low oil price environment as well as problems that the industry sees with Mexico’s auction terms.
By Evan Kelly Of Oilprice.com
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