Oil Futures Fall on Greek Crisis

NEW YORK (DTN) -- New York Mercantile Exchange oil futures ended more than 5.0% lower across the board Monday afternoon, as the U.S. dollar rallied to a one-month high as the outcome of Sunday's referendum in Greece spooked global markets to trigger heavy selling across commodities and equities markets.

"The market just gave in ... there was no one particular event precipitating the meltdown, but it's true there's a general concern about global demand," said analyst Phil Flynn at Price Futures. "There's also fear that Iran will export more oil once sanctions are lifted."

Others agreed.

"[Oil] markets are falling easily with the no-vote by Greece dominating the headlines," said Citi Futures analyst Tim Evans. "Oil traders may [also] be concerned regarding the idea that an Iranian nuclear agreement may be within reach, with a deal to lift sanctions allowing an eventual increase in Iranian production."

The NYMEX August West Texas Intermediate crude contract plummeted $4.40 or 7.7% to a $52.53 barrel (bbl) settlement, near a 2-1/2 month spot low of $52.41. ICE August Brent crude futures plunged $3.44 to a $56.54 bbl settlement, off a three-month spot low at $56.38. The Brent premium over WTI narrowed $1.13 to $4.01 bbl at the close.

Oil products futures also crated, with the NYMEX August ULSD contract nose-diving 13.10 cents to a $1.7089 gallon settlement, ending near a three-month spot low of $1.7050. The NYMEX August RBOB contract toppled 11.06 cents to a $1.9237 gallon settlement, near a better-than two-month spot low of $1.9205 gallon.

On Wall Street, U.S. equities spiraled lower in line with overseas bourses while the dollar surged to a one-month high versus a basket of six major currencies including the euro. The euro fell to a four-day low versus the greenback. Treasuries also gained on demand by investors who fled to the safety of U.S. bonds and the dollar.

Risk-averse investors exited long positions on speculation the Greece crisis would deepen even further, as the country sets out on an unchartered path. A day after Greek voters overwhelmingly backed their Prime Minister Alexis Tsipras by voting 61% against a bailout proposal offered by creditors, the market was trying to figure out what would be the fallout of that vote.

The initial speculation was that Greece was on course to leave the euro, but it appears that too is uncertain. Investors were somewhat reassured after the European Central Bank confirmed it would maintain its emergency liquidity to banks in Greece, although it will require more collateral. It would have been even better for Greece if ECB had expanded the emergency loans, analysts said.

The International Monetary Fund also said it's ready to help Greece if asked by Tsipras despite the fact that Greece defaulted on IMF's loans on June 30. In addition, French President Francois Hollande and German Chancellor Angela Merkel said they respect the Greek vote and added the door remains open for negotiations. They said a deal for a new bailout would depend on specific proposals offered by Tsipras.

For his part, Tsipras said he's working on a new proposal to be presented to their euro-zone creditors on Tuesday, July 7. He also appointed a new finance minister who is less antagonistic as a way of smoothening frayed relations with the creditors.

Meantime, capital control imposed in Greece last week is starting to have a toll on the public, with reports of pensioners and the sick suffering, while a seven-day bank holiday that was set to expire Tuesday has now been extended to Wednesday, July 8.

Greece's financial woes are going to worsen this month. On July 13, Athens will be required to pay back 350 million euros to the IMF followed by another 3.5 billion euros to the ECB due on July 20. Defaulting on either loan would effectively cut the country from the financial system and set the stage for an exit from the euro, analysts said.

NYMEX oil futures were also pressured lower by the Iranian nuclear talks that are expected to conclude this week. U.S. Secretary of State John Kerry tamped down expectations after reports said Iran was closer to a deal with six major world powers by a Tuesday deadline. Kerry said some differences remained and the talks could go either way.

The United States and its allies want Iran to freeze its nuclear development program in exchange for relief that includes lifting of sanctions that would allow Iran to access millions of dollars frozen in foreign bank accounts and could also allow Iran to double its oil exports.

One of the sticking points is whether Iran will accept a strict monitoring regime on the nuclear program that the Obama administration said won't allow Tehran to cheat. The Obama administration believes that is possible, but there are many doubters in Congress, Israel and in Saudi Arabia.

For the market, extra oil exports by Iran would further saturate an already oversupplied market. Iran produced 2.8 million bpd of crude oil last year, down from 3.7 million bpd in 2011 when tough sanctions were imposed on Tehran due to its nuclear weapons program, according to data from the Energy Information Administration.

Domestically, the market awaits weekly oil supply data due Wednesday from the EIA for the week-ended July 2. Flynn forecasts U.S. crude stocks may have increased for the second straight week, up by 1.0 million bbl after a 2.4 million bbl build a week prior. Flynn also estimates a 500,000 bbl crude stock increase at Cushing, Oklahoma, supply terminal which also serves as the delivery point for NYMEX WTI crude.

George Orwel george.orwel@dtn.com