Cyprus and the Price of Oil

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The apparent resolution of the banking crisis in Cyprus has sent the price of WTI crude oil up more than 1.5% today, now above $95 a barrel. Brent crude is also up about 0.7%, above $108 a barrel. Traders likely have concluded that with Cyprus’s problem banks now in the rear-view mirror, it is safe to assume that demand for oil will rise.

That may not be the way it works out. In the first place, the Cypriot economy is very small. The chances that it really will sway demand for oil approach zero. And the knock-on effect of the solution — essentially confiscating deposits from accounts greater than €100,000 — will likely be more movement of more money out of banks in eurozone countries that are deemed to be shaky. That list currently includes Portugal, Spain, Italy and Slovenia, and France could be added. Any large depositor is almost certain to head for a Swiss bank, or if the company is big enough, the European Central Bank (ECB) itself. Siemens A.G. (NYSE: SI), for example, reportedly had moved some €6 billion to the ECB by 2011.

As more depositors move funds from those banks, lending will slow. As lending slows, so does the national economy and so does demand for imports from places like the United States. Coupled with higher U.S. crude production and lower U.S. consumption of refined products, demand for crude in the U.S. is not likely to expand either.

Even less likely is demand expanding in Europe. Energy economist Philip Verleger thinks crude demand could fall by half a million barrels a day by the end of this year.

Today’s rise in oil prices probably will not last much longer, nor will it prove to be a sustainable increase. The economics just do not support it.

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