Crude Oil Prices and the Eurozone – How the Crisis is Impacting Stability
While the global financial markets have displayed considerable strength despite the growing economic tumult, it is only natural that they should continue to experience fluctuating fortunes and volatile conditions. This principle can be applied to a number of individual markets and financial instruments, each of which are directly impacted by wider economic events.
Crude oil prices have endured a particularly unstable 2012, as the eurozone crisis has taken hold and had a drastic impact on nations including Greece, Portugal, Italy, Spain and Ireland. The situation has hardly been helped by talk of the fiscal cliff in the U.S., which could force the federal government to implement widespread tax hikes and slash public spending by up to $600 billion from 2013.
Why Prices have Consolidated as December Approaches
Fortunately there has at least been some positive news in the crude oil market this week, as eurozone ministers and the International Monetary Fund (IMF) finally agreed a deal to financial additional loans to debt ridden Greece. While the estimated sum of 47 billion Euros will provide only temporary relief and falls some way short of the amount that Greek investors had called for, it does lay a foundation from which Greece can reduce their fiscal liability and approach a financially solvent future.
This has allayed growing concern in the financial markets, and allowed crude oil prices to stabilize in line with the global economy. As a consequence, Brent North Sea crude for delivery in January eased by 52 cents to $110.40 a barrel on the London Stock Exchange at the beginning of the week, while the West Texas Intermediate (WTI) exchange added nine U.S. cents to achieve a price of $87.83 per barrel. These price movements reflected a sudden surge in investor confidence, as both the U.S. Congress and eurozone ministers edged closer towards respective resolutions.
The Need for Caution: Why the Most Recent Greek Bail-Out Does not Guarantee Long Term Market Stability
The news of an additional Greek bail-out has also been supplemented by surprising statistics in the U.S., which suggested that the consumer confidence index rose from 73.1 to 73.7 and achieved its highest level since February, 2008. Despite the initial sentiment that greeted both of these announcements, however, the mood of investors has already began to dissipate. This is primarily due to the lack of definitive or authoritative economic projections for 2013, which continues to create instability and uncertainty within the financial markets.
As if to reaffirm this, the crude oil recovery and subsequent period of consolidation is already showing signs of stalling. After the initial wave of positivity among investors began to wane, the price of crude oil remained fixed at $88.23 per barrel as caution again emerged as the watchword for market participants. Although economist predict that sideways price movements are likely in the coming weeks, it is thought that only a break above $88.50 per barrel would dramatically improve the near-term outlook.
The fluctuation in crude oil prices has provided a fascinating insight into the current financial markets, and how vulnerable they are to wider economic circumstances. While positive developments in both the eurozone and the U.S. may improve market sentiment temporarily, the doubts surrounding the Greek economy and the capacity of warring U.S. Senators to strike an amicable budget agreement will linger until each issue is definitively resolved. With this in mind, price movements in the crude oil market and the foreign exchange arena (Forex, FX) are likely to experience further volatility at least until the first financial quarter of 2013.