the oil market fell sharply, amid renewed concern that Spain may not be able to avoid a costly sovereign bailout and the global economy may sink into recession, which could impact on oil demand. Benchmark US crude prices fell by $3.69, or 4%, to finish the day at $88.14 per barrel in New York. Brent crude, which sets the price for imported oil, lost $3.57, or 3.3%, to finish at $103.26 per barrel in London.
Adding further economic woes and therefore slower oil demand, representatives of the European Commission, the European Central Bank and the International Monetary Fund (IMF) return to Athens on 24 July, aiming to enforce further austerity measures on the troubled nation. In a meeting with former US President Bill Clinton that may bring much-needed investment, Greece’s Prime Minister Antonis Samaras compared the current situation in Greece with the Great Depression that devastated the American economy the 1930s.
Crude also fell after a Chinese central bank adviser said the nation’s economy may cool further, putting at risk consumption in the world’s second-biggest crude consumer.
Further adding to softness in oil markets, the American Petroleum Institute (API) said in a report that, due to a slowing US economy, demand for crude oil, gasoline and distillates fell in June from a year earlier.
Fadel Gheit, a senior energy analyst at Oppenheimer in New York, told New Europe on 23 July that oil prices are still inflated. “Oil prices should be at least $10-20 lower than the current level. The global economy is not strong enough to sustain the current oil prices and the longer they remain high, the more pain and suffering is going to be inflicted in the global economy,” he said, adding that high oil prices will derail any prospect of economic recovery in Europe and the US.
He noted, however, that the Middle East is already in shambles. “It’s like a powder keg ripe for big explosion,” he said. Caution about potential supply disruptions in the Middle East, which drove oil prices up last week, remained as violence in Syria intensified.
Gheit noted that Syria produces only a couple hundred thousand barrels of oil a day but the biggest fear is that the conflict could spread to other parts of the region, including Iraq and Saudi Arabia.
On 22 July, Israeli Prime Minister Benjamin Netanyahu expressed his concern that the Damascus government may collapse and its stock of chemical weapons and missiles fall into the hands of the Lebanese Islamist group Hezbollah.
And in an indication that the standoff between Iran and the world powers over the enrichment continues, Iran’s nuclear chief said on 22 July that Tehran has sent a new batch of enriched uranium to fuel a medical research reactor in its capital.
Gheit said that if the situation in the Middle East leads to a disruption in oil flow then oil prices will go significantly above the current level and might even touch an all-time high but only on the short-term. “I don’t believe that any conflict with Iran will last for months or not even for weeks,” he said. If Iran makes good on its threat to block the Straits of Hormuz that would be an act of war immediately, the Oppenheimer energy expert said. “In a few hours you will see severe military response that will sober them up. This is not the time where they can tinker with global economic interests. The only country that would benefit significantly from any disruption of oil flow in the Middle East is going to be Russia and obviously the world is going to be watching very carefully,” Gheit said, adding that a disruption of oil flow would devastate the economies of Japan, China, Europe and US. Gheit said that it is unlikely that Tehran would block the Straits of Hormuz since it would threaten its own regime.
Meanwhile, firefighters in southeast Turkey on 21 July put out a fire on a pipeline carrying about a quarter of Iraq's oil exports. Iraq resumed oil exports to Turkey after an explosion shut a pipeline that carries as much as 350,000 barrels a day, Sumaria News reported on 21 July. The Kurdistan Workers’ Party (PKK) claimed responsibility for the Iraqi explosion. The 20 July blast damaged one of two pipelines that transport oil from Kirkuk in northern Iraq to the Turkish port of Ceyhan. Both pipelines were closed.