prices careened downward to the lowest level since April 6
sounding alarms for commodities traders and countries whose
economies are dependent on energy revenues with analysts
predicting that the worst is still yet to come.
Friday, Brent crude broke past the $42 a barrel resistance level
tracing into bear market territory while its US counterpart West
Texas Intermediate was down 1.1% to $40.60 a barrel.
prices have collapsed a concerning 16% for the month of July
on a whole marking the worst monthly decline for the year
so far. Prior to this month, energy prices had been on a
general upward trend after falling to a 13-year low of $27
a barrel in February.
story behind the violent crash in oil prices has been the
same throughout the month with US energy reserves holding
strong despite a slowdown in production in the face
of flagging economic demand that saw the American economy grow
only 1% in the last quarter and with manufacturing data
signaling a recession may be on the way.
addition to flagging demand, supply continues to overwhelm
the market as Saudi Arabia forges forward on its baton
towards oversaturating the world’s oil market.
When oil prices careened off a cliff in February, the
Saudi Kingdom vowed to increase energy output by 1 million
barrels of oil per day (mbd) immediately with a similar
jump in production planned for July.
total, would oil output remained fairly constant near 100
million barrels of oil per day outstripping demand by roughly
2% causing energy stockpiles to swell across the globe.
demand continues to look bleak in the near and
mid-term future with China’s latest GDP figures sparking
concern despite jumping above a 6% annual growth rate
for the first time in years as analysts noted that
over 60% of China’s economic output was traced directly
to economic stimulus.
downward spiral in oil prices could end in a sharp bounce
back for energy markets with analysts fearing that oil-rich
states like Libya and Venezuela, whose budgets are based heavily
on commodities prices and which lack sufficient access to credit
markets, could descend into political chaos due to continued
economic pressures caused by the collapse in oil prices –
this would cause production to falter suddenly pulling millions
of barrels of oil per day off the market pushing
traders express concern that areas that have been impacted by recent
supply disruptions, particularly Canadian oil fields savaged by the
Fort McMurray fire and Nigeria whose output remains unpredictable due
to political unrest, may soon see a return in output
worsening global oversupply.
US investment bank Goldman Sachs issued a warning on Thursday
that oil prices will remain below $50 per barrel until at least
mid-2017 and that risks remain "skewed to the downside,"
cautioned that oil prices face downward pressure in relation
to a strengthening US dollar in the wake of Britain’s
historic vote to exit the European Union which they anticipate
will stifle any possibility of prices rebounding in the
Banking Crisis Leaves
EU Scrambling to Avoid Repeat of
financial institutions in Europe have hardly been more vulnerable to
an economic tremor, a situation worsened by the collapse of the
German credit market as Berlin suddenly stopped issuing new debt.
top financial institutions are teetering on the edge of collapse
as access to high quality debt products have created a
liquidity freeze rendering many institutions near insolvent
according to the European Union stress test that assesses each
bank’s ability to withstand the shock of a global
Bank of England rushed in to reassure global markets that
UK lenders remain in a strong position to weather global
financial shocks, but the rest of Europe may be in for
more than its fair share of turbulence.
European Banking Authority (EBA), an EU institution, coordinated the
test of 51 lenders from across the bloc expressed concern
in the wake of the test noting that most of Europe’s
banks are not properly situated to withstand a major market
in with one of the worst stress test results was perhaps
the most systematically important financial institution in Europe,
Deutsche Bank. The financial institution saw a 98% plunge in its
annual profits sparking concern that it may be the Lehman Brothers
of 2016 creating a domino effect infecting the assets of the
global financial system.
as bad as the news has been for Deutsche Bank, the
prize for the most vulnerable financial institution in Europe
went to Italian lender Banca Monte dei Paschi di Siena (BMPS),
the world’s oldest bank. BMPS is reportedly loaded with toxic
loans and mortgages and in the event of an economic
downturn the institution’s capital ratio would dip into negative
territory – or bankruptcy.
Europe’s banks appear shaky enough that a light summer breeze could
knock them over, economic analysts wonder whether macroeconomic
headwinds will persist turning the danger into a tragedy.
shock that crushes Europe’s financial sector may not be the start
of worldwide recession – although Britain’s post-Brexit
economic output looks dreary, China is surviving on a flood
of stimulus spending, and the United States GDP growth was an
uninspiring 1% in the last quarter – but instead the
sudden drying up of German debt markets which means
overleveraged financial institutions cannot access capital to cover
European Central Bank largely created the dry up in the credit
markets through its Quantitative Easing stimulus program fueled
by the purchase of German government bonds to infuse
new liquidity into the financial markets, but Germany has
halted borrowing and the ECB is blocked by its own rules
from purchasing other bonds that are below benchmark
interest rates, reports Die Welt.