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This Week In Energy: Oil Prices Hinge On Two Financial Crises

It has been an eventful week. Two major financial crises are destroying the bullish case for oil.

The Greek crisis continues, although there are signs that some semblance of a solution is at hand. Europe had demanded a new proposal and set this Sunday as the absolute final deadline, ruling out any further extensions. Greek Prime Minister Alexis Tsipras offered a new proposal to European creditors on its debt situation and appeared willing to accept most European demands in exchange for some debt relief.

Greece has asked for a three-year bailout, and will make further concessions on austerity, cutting spending in key areas of its economy. But in perhaps a surprise move, creditor nations are looking at offering some debt relief. The international pressure on Europe has grown, with calls to offer some debt relief to a country that is mired in five years of recession (or depression), has 25 percent unemployment, and cannot pay its bills. Even the European Council’s President, former Polish Prime Minister Donald Tusk, has joined international calls for debt relief, as part of a loan package. The German Chancellor has been adamantly opposed to debt relief, but with the White House leaning on Europe to act, further austerity in exchange for some debt relief offers all sides a face-saving way out of the crisis. That could pave the way for a financial lifeline to Greece, hours before a hypothetical Grexit from the Eurozone. Related: OPEC Still Holds All The Cards In Oil Price Game

Meanwhile, Greece announced a 2 billion euro plan with Russia over the Turkish Stream Pipeline, a natural gas pipeline that would run beneath the Black Sea, carrying Russian gas to Europe. Greece’s energy minister announced preliminary plans for the project on July 8, just as Greece was entering into the final days of its standoff with Europe over its debt mess. The energy minister vowed not to be pushed around by Europe, and the move is seen as a snub to Brussels, which prefers an alternative pipeline from Azerbaijan. The Russian-backed pipeline, if constructed, would carry 47 billion cubic meters of natural gas and would begin operations in 2019. However, there are very large question marks about the viability of the pipeline.

Moving on to another international financial disaster that is looming over oil prices. The turmoil in Chinese stock markets rapidly spun out of control this week, with Beijing finally taking aggressive action to stop the accelerating meltdown. The Chinese government said that it would “punch back” against illegal short selling, which it called “malicious.” The government banned large investors from selling their positions. It also said that there would be “abundant liquidity” provided for the markets. Several hundred companies suspended trading temporarily in an effort to halt the selloff. After the two stock exchanges lost several trillion dollars’ worth of value over the past few weeks, the Shanghai Composite and the Shenzhen Composite finally clawed back some lost ground on July 9 and 10. Related: The Next Fracking Boom May Be Closer Than You Think

With the two major financial crises showing some positive developments, oil prices surged on July 9, trimming losses inflicted over the previous week. WTI gained more than 2.5 percent to hit $53 per barrel, and Brent gained more than 3 percent, closing in on $60 per barrel. Oil dropped a bit on July 10, however, on estimates from the IEA pointing to soft oil prices throughout this year.

The Iran negotiations hit a last minute snag in Vienna. There were reports that U.S. Secretary of State John Kerry and Iranian Foreign Minister Javad Zarif got into a shouting match behind closed doors. An aid had to interrupt the two diplomats to inform them that their argument could be heard by people on the other side of the doors. Moreover, the top EU Foreign Policy official Federica Mogherini also got into a heated discussion with Zarif. She threatened to cut off the talks and Zarif shouted back, warning her to “never try to threaten the Iranians.” Russian Foreign Minister Sergei Lavrov jumped in and added “nor the Russians.”

Although Iran and the P5+1 nations set July 10 as the final deadline for negotiations, the parties extended talks once again. Kerry said that the talks are not open ended, but at the same time should not be called off when they are so close to a deal. Talks will continue for at least a few more days. Related: Nuclear Is Not Dead, Uranium Supply Deficit Could Be On The Horizon

Despite the past week’s collapse in oil prices, Pioneer Natural Resources (NYSE: PXD) said that it would be adding rigs to the field in order to drill more this year. After selling its pipeline and processing business in the Eagle Ford Shale, Pioneers said that it would add two rigs per month to the Permian Basin for more drilling. It will add eight more in Texas next year, and its total rig count will hit 36, the same number of rigs that it had in operation before the collapse in oil prices. While other U.S. shale companies are withering under low oil prices, Pioneer is getting back in the action. That is a sign that some of the stronger shale companies could emerge in relatively good shape moving forward.

The conflict in Libya over two opposing governments shows no signs of abating, but this week the National Oil Corporation in Tripoli lifted the force majeure over the Ras Lanuf oil port, which had been in place since last December. The move could allow for more oil exports. However, the internationally-recognized government in Eastern Libya disputes the lifting of the force majeure and said that it would seize any oil tanker that is not authorized to dock at Ras Lanuf. The situation is fluid and confusing, but needless to say, uncertainty reigns in Libya, and there is no telling whether or not it will be able to add further supplies to global markets. If oil can be exported, Libya could add several hundred thousand barrels per day, adding to the glut of supplies.

By Evan Kelly Of Oilprice.com:

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