Bearish fundamental factors lined up this week to fuel a sharp break by September Crude Oil futures. The week began with Greek citizens voting “no” to a list of demands from its international creditors. This brought the country closer to default on its loan with the International Monetary Fund and an exit from the Euro Zone. Also contributing to the selling pressure were a series of moves by China’s central bank designed stem the country’s stock market crash. These moves helped drive down global commodities markets.
Even before the week started, traders were taking about selling because of a reported increase in the Baker Hughes rig count. At mid-week, the U.S. Energy Information Administration reported another increase in oil inventories after traders had priced in an expected drawdown. This too factored into the weakness.
The crisis in Greece is punishing to crude prices because it is creating turmoil in the Euro Zone. This has helped create uncertainty and that has curtailed demand. In addition, it is the primary driver of the sell-off in the Euro. When the Euro gets weaker, the U.S. Dollar gets stronger. Since crude oil is dollar-denominated, the stronger dollar makes it more expensive for foreign buyers. This also pressures demand.
Since the situation in Greece appears to be close to ending, the focus this week will be on China and U.S. production. There are two ways the Greek crisis could end. Firstly, it could agree to the terms…