The Grexit Premium for Oil

In the first post of this blog I mention what a lot of people already know anyway: the best way to lower oil prices is to go into recession. Low demand will result in price drops to suit it. This is what we saw a few days ago when oil prices fell sharply from $98 to, what is now, $93 per barrel. The trigger was the outcome of the recent Greek elections which scared the living **** out of recession hit Eurozone countries as well as markets around the world, who themselves are terrified at the possibly immense cost of a Grexit (Greek Exist from the Euro - JPMorgan estimates immediate costs of $400 billion). Prior to this, on May 1st, poor growth output from China and a revision of their GDP growth sent barrel prices down from $106 to $98 in a matter of days (a good lesson for some US politicians about where the oil price hikes really come from).

The last time deep recession fears caused a significant drop in oil prices was back in the Summer of 2011 when the GOP and Obama squared off on the debt ceiling debate; you know, the debt ceiling? The thing Republicans raised constantly during the Bush years but then figured when a Democrat did it, it violated their religious, constitutional, human and civil rights all at once? Back then the price dropped from $100 to $81 per barrel in just two weeks.

Figure 1: Price of a barrel of crude ($) vs. Time. Source: Plus500.com

Elections in Greece will come again in mid-June and there are now real fears that SyRizA, the radical socialist anti-bailout party, will top the vote. The real question is what the Grexit premium is i.e. how low the price goes until markets are content they have gone down enough to make up for the risk of a deeper European recession. Prevailing opinion is that prices will continue to drop or remain steady next week, so perhaps we are near the Grexit premium (ca. $10)? However, in the medium term, the promising re-opening of talks with Iran, lower forecasts for China's growth and Greek election uncertainty should keep the prices of oil down from where they have been the past months.