Oil Tanks Thanks To Iran And Greece

This week has been rough for crude oil prices with investors getting jittery about Greece. This week we have seen Greek banks shut down and impose capital controls and as of yesterday they are officially in arrears with the IMF. The blowback on the financial markets caused crude prices to hit a 3-week low. Adding insult to injury, crude oil is traded in dollar prices. Greece’s debt default window has caused the dollar to gain against the euro once again this year. The comparative increase for European investors has combined with their fears the default’s repercussions to cause a dip in demand for crude. For some, it seems that oil could bounce back quickly once the Eurozone settles things with Greece. Those people are mistaken.

The Global Oil Market

Greece’s problems will not be solved quickly. Even if Greece exits the Eurozone, there will be a continued slump in European demand as the healthier economies in the currency union reestablish their fundamentals. Europe may have a considerably high consumption to production rate in the world of oil, but even an economic recovery can account for what is happening in one of the world’s largest oil-producing countries.

Back on the Main Stage?

Iran is making positive progress in forming a viable nuclear deal this week. Ever since the United States and partner economies imposed sanctions against Iran for working on nuclear arms development, one of the world’s largest oil suppliers has been largely out of the game. The best sign of real progress so far has been the willingness of all parties to extend their self-appointed deadline to iron out the details. If the deals work out well, Iran will once more be able to export oil en-masse throughout the world. Good news for Iran’s stunted sanction economy, bad news for crude oil prices.

Gluttons after Punishment

Iran is trying to enter the global oil market at its fullest. US refinery output and Saudi unwillingness to cut production have already suppressed oil prices for the first two quarters of the year. Tens of millions of barrels of Iranian oil are already packed and ready to go, just waiting for sanctions to be lifted. US oil prices have remained in the upper $50’s to lower $60’s for some time now, but further supply could cut those prices down to $50 per barrel or lower.

Trading Peace for Insecurity

The Iranian nuclear negotiations are, in many ways, being held in the name of a more peaceful relationship with the US. Establishing that peace, however, may have a negative effect on the US economy. Crude hitting or breaking below $50 per barrel is problematic for North American producers, where hydraulic fracturing, or fracking, is now the main method of crude oil extraction. The costs of fracking make drilling and developing new wells in fields throughout West Texas and the Rockies unprofitable if not utterly untenable. Whereas Iran and Saudi Arabia are sitting on heaps of artesian wells that shoot up oil the moment they are pierced.

How to come out on Top

For futures traders, it’s time to keep an eye on things in Geneva. If talks fall apart we may see a short bump in Oil prices and then a fall back to where it was a few weeks ago. If talks succeed, it may be time to switch commodities. As far as those who prefer equities, low oil prices can bolster the value of companies that rely on petroleum fuel sources as a crucial aspect of their business. No more Iranian sanctions will mean better margins for airlines, transportation, and logistics companies. Remember, when the news gets exciting, you can find a way to make some money.