As strained negotiations between the Greek government and European financial ministers enter the end-game, the impact on energy markets remains uncertain. Setting aside both the deeply troubling social impact for Greek citizens and other major forces – from Chinese equities to an Iranian nuclear deal – the threat of Greece leaving the Euro is already dampening crude prices.
The concern for oil markets centers around two factors: the consequences for economic stability and growth in Europe, and strengthening of the US dollar.
Greece herself consumes less than 0.4% of global crude, produces fewer than 9,000 barrels per day and had an economy of $240bn last year – around 0.3% of the global total. An exit from the Euro, however, threatens the breakup of the Eurozone itself, a major global economy and consumer of 9.7 MMb/d.
Should Greece "walk away" from her debts, exposure to the debt in other member states, coupled with premiums for borrowing (particularly in Southern Europe) could be expected to usher in another period of recession.
Estimates from the IMF suggest a contraction of between 2% and 5% is possible. While this picture remains highly uncertain, historical linkage of oil consumption and GDP growth would imply a potential reduction of 360,000 boe/d per year in consumption. Tiny indeed, but in an over-supplied market, every portion of demand is important.
Ever-deeper uncertainty within Eurozone economies however, is likely to increase the flight of capital to dollar-based equities, The Euro has already fallen 18% against the dollar in the past 12 months and a Greek exit would likely dampen this significantly as investors look nervously at other debt-laden Euro members. A strong dollar weakens international oil demand as the commodity, traded in US$, is more expensive on a relative basis.
If "Grexit" becomes a reality it will serve to further dampen the recovery in oil price. It will be interesting to see the impact of the weekend’s "In-Out" meetings in Athens and Brussels on oil prices in the week ahead.