Euro crisis, Brent oil edition | FT Alphaville

Euro crisis, Brent oil edition

Courtesy of Olivier Jakob at Petromatrix, FT Alphaville presents the price of front-month Brent oil futures expressed in euro terms:

That would be echoes of the 2008 record oil price. This time, only for Europe.

As Jakob notes:

There is currently not one day where we do not publish the chart of Brent in Euro/bbl and this is because we do think that the record prices for oil in Euro/bbl will be the next leg of the European crisis. The current record oil prices for European consumers will morph into a new energy crisis for Europe and it will hit both consumer sentiment and disposable income right at the time when austerity measures will kick in.

The combination of the Iranian premium and of the Dollar premium will be a kiss of death for European oil demand but also for European global consumption. Because of the Iranian risk premium the correlations between the price of oil and the Euro/Dollar have totally broken down, but the oil correlations to the S&P500 are still extremely high. If we were running with the same Euro/Dollar correlations as in October, Brent today will be priced at 96.00 $/bbl ie at a 17 $/bbl discount to current levels.

In other words, Europe has completely decoupled from the rest of the world in terms of energy prices.

All of which presents a big problem for European refineries:

Petroplus has now lost all its credit lines and without credit lines it will be difficult for the Swiss holding to continue operating its German and British refineries. Petroplus is unfortunately not the only refinery to fall to the poor processing economics. The Lyondell refinery in Berre, France (105 mbpd) is being mothballed and Repsol decided last week to shut one CDU (110 mbpd) and the FCC at its Bilbao, Spain refinery for at least one month due to collapsing demand and poor refining margins.

In this difficult environment for European refineries we are supposed to believe that the Greek refineries that are currently running with 64% of their crude intake from Iran (due to the flexible credit conditions given by that country) will continue to run once an embargo is in place? Greece is trying to bargain an official support for the embargo in exchange for a long grace period but we are not sure that Iran will be a happy provider of “grace barrels”; hence we have to account a closing risk for the Greek refineries. If the Spanish refineries are having a tough time to currently run we do not see how the Greek refineries without Iran will do better than the Spanish.

Just what Europe needs, eh?

Related links:
Bye, bye WTI-Brent spread disconnect…
– FT Alphaville
Refinery closures raise fears on oil prices – FT