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Greek possible Grexit and Crude Oil’s fall drive the markets crazy : Analysis

US and European equity markets continue to fall as a consequence of another drop in oil prices, fears of financial instability in Europe over Greek debt and the signs that global deflationary pressures are rising.

Currency markets instability occurs as the US dollar hit a nine-year high against a basket of currencies, while the euro touched a nine-year low, amid concerns over whether the Greek election, to be held on January 25, would spark political instability if the opposition SYRIZA coalition were to win.

The plunge once again sent fear through global markets. The Standard & Poor’s 500-stock index fell 37.62 points, or 1.83 percent, to 2,020.58. The Vix, a measure of market volatility that is known as Wall Street’s fear gauge, leaped about 12 percent. And in Tokyo, the Nikkei 225 tumbled more than 2.5 percent Tuesday in morning trading.

Europe is weaker, with the euro at nine-year lows against the dollar; particular weakness in the Greek stock market, down almost 5 percent, with Greek debt yields also rising, on reports over the weekend that Germany might permit a Greek exit from the euro. Peripheral countries like Spain and Italy are also down 1 to 2 percent.

nasdaq crude oil prices
End of day Commodity Futures Price Quotes for Crude Oil WTI (NYMEX)
euro usd exchange graph
Euro per 1.00 US Dollar Graph

Future currency forecasts

ECB Monetary Stimulus Speculation Pressures Euro (EUR) Exchange Rate Lower

ECB President Mario Draghi caused a kerfuffle last week when he hinted that the central bank will be making policy adjustments in the near future.

Draghi stated: ‘We are making technical preparations to alter the size, pace and composition of our measures in early 2015.’

Another factor pressuring the Euro exchange rate lower is the fear that Greece could leave the Eurozone. Despite Germany believing that the Eurozone (and by extension the Euro) could handle a Greek exit, others are less optimistic.

Many economists have speculated that if Greece does leave the 18-nation Euro area and benefits from the separation, other nations may also want to exit.

Saudi Arabia’s oil game explained

What is Saudi Arabia up to? Economic analysis suggests that Saudi Arabia is using its dominant market share and price leadership role to dwindle oil prices and take out the competition, thereby preparing the way for steep price increases down the road. If anything, taking steps now to curtail production to keep prices high would only encourage even more investment in alternative oil sources.

The Organization of Petroleum Exporting Countries’ inability to reach agreement on output shares is often a traditional economics lesson on the failure of cartels to maintain long-run price stability, but such a conclusion is myopic. The reality is that Saudi Arabia, because of its large share of global oil production, can influence prices on its own in the absence of cartel action.

From a price of US$115 a barrel in June, prices have dropped about 50% and now sit below US$60 a barrel. Even at such low prices, Saudi Arabia can still compete, because it’s a low-cost producer with its cost of production estimated as low as US$5 to US$6 a barrel. It can tolerate even lower prices than what oil is currently at.

Crude Oil forecast

Citi says it is most probable that the oil market will stabilize by the end of 2015, with the Brent price averaging $63 a barrel for the year — several dollars above the current price. But its more bearish forecast, with a 30 percent probability, is for Brent to average $55 for the year, roughly the current price.

Signs suggest that oil and oil product supplies will soon be increasing. The ramping up of several refineries in Saudi Arabia and the United Arab Emirates is likely to increase exports of products like gasoline and diesel by 500,000 barrels a day in the coming months. Even without the Keystone XL pipeline, other Canadian pipelines coming online will bring as much as 350,000 more barrels onto the market.

Sources: World Socialist Web site, cnbc.com, nasdaq.com, biv.com, nytimes.com

Read more:

Books recommended:

crude oil trading
Crude Oil Trading: Your Complete, Step-by-Step Guide to Crude Oil Trading


The New Kings of Crude: China, India, and the Global Struggle for Oil in Sudan and South Sudan

En français:
Non ! Les Grecs ne sont ni des voleurs ni des menteurs

 

 

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