Benchmark crude oil futures will likely extend last week's sell-off as the Federal Reserve may cut its U.S. growth forecast for 2011 at its two-day policy meeting this week. Meanwhile, optimism about a second bailout package for debt-laden Greece may prove supportive though many continue to fear Athens may still default. Crude oil futures [CLCV1 92.46 -0.55 (-0.59%) ] dropped more than 6 percent last week, the biggest weekly loss since early May, reflecting risk-off selling momentum across global financial markets as investors worried about the contagion risks from a Greek default. A continued soft patch of U.S. Economic data deepened the negative tone across commodity markets.
NYMEX crude settled at $93.01 a barrel on Friday, dropping $6.28, or 6.3 percent, for the week. That marks the biggest weekly percentage loss since prices fell a record $16.75, or 14.7 percent in the week to May 6. Meanwhile, front-month Brent settled Friday at $113.21 a barrel, falling $5.57, or 4.69 percent, over the week - the biggest weekly loss since the week to May 6, when prices tumbled $16.76 or 13.3 percent.
Selling is set to continue this week, according to CNBC's weekly poll of oil analysts, traders and strategists. Out of ten respondents, six are calling for prices to fall, three say prices will rise while one expects little change.
"The Greek debt crisis will remain the driving force and a default could have very serious implications for several members of the euro zone," said Linda Rafield, Senior Oil Analyst at Platts. "A test of $90/barrel is imminent. If $90.09 front-month NYMEX crude can't hold, then the market will probe even lower levels - there is a gap down to $87.88/b that was formed back in February by the beginning of the uprising across MENA."
For Brent, Rafield said a break of $111.21 will signal a move down to $106.00. "Neither market has breached major support lines - not yet," she added.
Dovish Tone From Fed? Currency markets, and how they react to what may be the endgame - or the latest act - in the Greek tragedy and perhaps more importantly, the tone struck by Fed Chairman Ben Bernanke at the press conference following the FOMC will have a decisive influence on oil and commodity markets this week.
Todd Elmer, Currency Strategist at Citi said Bernanke would strike a doveish tone. Still, the U.S. dollar could continue to draw safe-haven demand should Greek debt woes continue to weigh on sentiment, and any resurgence in the Greenback could add to the pressure on oil.
As a result of the anemic recovery, Fed policymakers will likely be in little hurry to exit QE2. Negative for oil would be any downgrade of the full-year growth forecast. How the Fed deals with the bout of what some are calling 'mini-stagflation' will also be closely watched. Assuming that the current soft patch of U.S. economic data "will be temporary (i.e. no double dip) and that China is not facing a hard landing, we would be buying dips in the Brent crude oil price at between $100 and $110 per barrel," wrote Societe Generale commodity analysts led by Michael Wittner.
The Bank advised: "It is critical to buy only on dips as, in the absence of further export disruptions from the Middle East or Africa, the fundamental outlook for the next few quarters is only moderately bullish. Preliminary U.S. oil consumption data suggest that this year's sharp price rally is starting to have a negative impact on demand."
Libya's Return
Although global macro events and policy risks predominate, strategists are also highlighting the importance of supply flows from OPEC, which suffered an embarrassing lack of consensus at its last meeting, and the producers hit by the Jasmine Revolution, ostensibly Libya. "While oil markets fret over the impact on global growth from turbulence in the euro zone sovereign debt markets, timing of Libya's return to the world oil export markets is arguably a more significant variable," wrote Lawrence Eagles at JPMorgan.
Recent comments from the head of the Transitional National Council's (TNC) National Oil Company highlight the length of the rehabilitation process ahead, Eagles added. "His comments suggest that infrastructure damage has been significant, both at a field level as well as export infrastructure. Furthermore, security on the ground for oil workers-both domestic and expatriate-will be a pre-requisite for any increase."
Overall, with the bias to the downside, forecasters are calling for a lower floor for oil prices. Platts' Rafield earlier talked about an imminent test of $90. Phil Flynn at PFG Best is predicting a an even lower floor at $85.
!*********************** European governments failed to agree on releasing a loan payment to spare Greece from default, ramping up pressure on Prime Minister George Papandreou to first deliver budget cuts in the face of domestic opposition.
On the eve of a confidence vote that may bring down Papandreou’s government, euro-area finance ministers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July as part of last year’s 110 billion-euro lifeline.
“We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a euro-crisis meeting in Luxembourg.
Decisions on the next payout and a three-year follow-up package were put off until early July, prolonging Greece’s fiscal agony and heightening the brinksmanship that has marked Europe’s handling of the unprecedented debt crisis.
The seven-hour finance ministers’ meeting coincided with the start of a three-day Greek parliamentary debate in Athens over a confidence vote in a new cabinet at what Papandreou called a “critical crossroads.” Papandreou has 155 seats in the 300-seat parliament. Referendum Proposal
The Greek premier said he planned to hold a referendum later in the year on a constitutional revamp with the goal of tackling the root causes of Greece’s debt and deficits that are “symptoms of the illness, not the cause.”
Papandreou travels to Brussels today to meet European Union President Herman Van Rompuy and European Commission President Jose Barroso. The confidence vote is scheduled for late tomorrow. The Greek crisis is set to dominate an EU summit in Brussels on June 23-24.
“The communication cacophony surrounding the policy response in our view is one of the reasons why the risk of contagion has remained and remains high,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.
The euro meeting was flanked by a teleconference of Group of Seven financial officials, two weeks after President Barack Obama singled out Germany as the key country responsible for preventing an “uncontrolled spiral of default” in Europe.
Prospects for a second aid package to stave off the euro area’s first default had been enhanced by last week’s decision by German Chancellor Angela Merkel to drop calls for a mandatory bond exchange that might lead credit rating companies to declare Greece unable to pay its bills. Merkel’s Concession
Merkel’s June 17 concession gave a lift to stocks, bonds and the euro, spurring optimism that Europe would get ahead of the debt crisis that has exposed the weaknesses of the 17- country currency union.
While the German gesture buoyed Greek bonds, the 10-year yield of 16.94 percent remains almost 14 percentage points above the yield on German bonds, Europe’s safest investment. Standard & Poor’s on June 13 cut Greece by three levels to CCC, branding it with the world’s lowest debt grade.
Speculation that Greece will default has bled into other European markets, leading economists such as Nouriel Roubini to predict that the 17-nation euro, the high point of Europe’s economic integration, won’t survive in its current form.
“I don’t rule out that Greece and Portugal, if they aren’t able to recover competitiveness and growth and social tension further increases, may go back to the drachma and escudo on the wave of populist governments,” Roubini, head of Roubini Global Economics LLC, told Italy’s Il Sole 24 Ore on June 18. Spanish Spread
Ireland and Portugal followed Greece in obtaining emergency loans in the past year. Spain’s finances came under the microscope last week, with investors pushing the extra yield on 10-year Spanish bonds to 261 basis points, the highest weekly close since January.
Moody’s Investors Service said June 17 it may cut its Aa2 rating on Italy, with 2010 debt of 119 percent of gross domestic product, Europe’s second highest after Greece.
Greece needs to cover about 4 billion euros of bills maturing between July 15 and July 22, and faces about 3 billion euros of coupon payments in the month, according to Bloomberg calculations. A bigger test comes Aug. 20 when Greece must redeem 6.6 billion euros of maturing bonds. Venizelos Commitment
The new Greek finance minister, Evangelos Venizelos, who was named in Papandreou’s cabinet overhaul three days ago, came to Luxembourg with a “strong commitment” to the planned 78 billion euros in budget cuts that provoked street protests last week.
“We can achieve our target thanks to the efforts of our people and thanks to the cooperation and the assistance of our partners,” Venizelos said.
More than 47 percent of 1,208 Greeks surveyed by Kapa Research SA for To Vima newspaper oppose the wage and spending cuts and higher taxes, and want early elections. Almost 35 percent said the package should be approved.
Germany, which as Europe’s largest economy is the biggest guarantor of the aid packages to Greece, Ireland and Portugal, insists on an “ambitious” economic overhaul in Athens, Finance Minister Wolfgang Schaeuble said.
“It also depends on Greece making the necessary decisions with a fundamental consensus of the political parties so that we can be confident that Greece will live up to its commitments,” Schaeuble said. Greek Rollovers
The key plank of a second aid package would be a pledge by banks, insurance companies and asset managers to buy new Greek bonds to replace maturing ones, instead of European governments stepping in with taxpayers money.
In a statement, the ministers said the unlocking of fresh aid depends on working out “voluntary private sector involvement in the form of informal and voluntary rollovers of existing Greek debt at maturity.”
While Germany bowed to European Central Bank and French demands not to compel investors to buy new Greek bonds as old ones expire, the lines are blurry between a “voluntary” and “compulsory” rollover that would lead rating companies to declare Greece in default.
On the table are incentives for bondholders to maintain their exposure to Greece.
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