Crude prices were in decline during the past five days amid a new round of losses in global equity markets following a week of recovery. The selloff was caused by lingering worries over Europe’s debt crisis with investors questioning whether the measures undertaken by the EU to save Greece from bankruptcy and prevent the crisis from spreading into other euro zone states would work. Greece’s soaring debt and lack of means to pay it off has caused the country to request a multi-billion aid package from the EU and the International Monetary Fund (IMF) and introduce a number of economic austerity measures in order to secure it. The debt-laden country that owes some €300 billion and whose budget deficit amounted to 13.6% of the GDP last year got €110 billion in loans from the EU and the IMF with European leaders later agreeing on a €750 billion fund to provide aid for other euro zone states, should they find themselves in a similar situation. Portugal and Spain, which have recently been downgraded by leading rating agencies, and possibly Italy could be the next countries to face fiscal issues.
The austerity measures introduced by Greece, which included raising of the pension age, tax hikes and pay cuts for public servants, were met with massive public discontent, while public opinion polls in Germany showed staunch opposition to participation in any bailouts and disapproval of the government’s actions.
Even the approval of Germany’s participation in the €750 billion bailout fund did little to improve investor confidence and had little impact on the markets. However, it bolstered the euro, which has recently hit four year lows against the US dollar.
Adding to the jitters was Germany’s decision to outlaw a practice known as naked short selling, or selling a financial instrument without owning or borrowing it in advance. The move sparked fears that the liquidity of bond markets could decline and the ban on naked short selling of certain euro denominated assets could be banned by other countries.
Main stock market indexes suffered heavy losses this week with the UK's FTSE 100 slipping below 5,000 at one point, while the Dow Jones Industrial Average was below 10,000 on Friday afternoon.
Crude hit seven month lows despite bullish inventories data that was released this week. The American Petroleum Institute (API) reported a surprising decline in US crude stockpiles of nearly 0.8 million barrels, while an increase was expected. A more closely watched report from Energy Information Administration (EIA) showed a smaller than expected increase of 200,000 barrels in US stockpiles. EIA also said that gasoline stocks shed 300,000 barrels and distillates, which include diesel and heating oil, were down by 1 million barrels. At the same time, oil stockpiles at Cushing, Oklahoma, which is the delivery point for benchmark West Texas Intermediate crude, rose to 38 million barrels with the overall capacity estimated at 41 million barrels.
July Brent Crude stood at US$72.11/barrel on Saturday, while US light, sweet crude for July delivery last traded at US$70.30/barrel on the New York Mercantile Exchange (NYMEX).