• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 9 mins GREEN NEW DEAL = BLIZZARD OF LIES
  • 6 days If hydrogen is the answer, you're asking the wrong question
  • 11 hours How Far Have We Really Gotten With Alternative Energy
  • 10 days Biden's $2 trillion Plan for Insfrastructure and Jobs
Self-Heating Concrete Paves the Way for Easier Winters

Self-Heating Concrete Paves the Way for Easier Winters

Drexel University researchers successfully tested…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

Did Brexit Kill The Oil Price Rally?

Brexit

Oil prices fell again on Monday after last week’s rout following the Brexit vote, deepening the losses and killing off a multi-month oil price rally.

There is quite a bit of debate around how lasting the negative effects of the Brexit result will be for crude oil. On the one hand, there has been no change to the physical oil market. The global economy continues to hum along, albeit at an unimpressive pace. Billions of people continue to fuel up their cars, factories continue to operate. In other words, not much has changed.

Although the UK ranks as a top five global economy, a Brexit won’t materially affect the supply/demand balance for crude oil, even if a withdrawal from Europe turns out to be hugely negative for economic growth. Goldman Sachs looks at the numbers: "If we assume a 2 percent drop in UK GDP in response to the exit vote, which is on the high end of our economists' estimates, then UK oil demand would likely be reduced by 1 percent or 16,000 barrels per day, which is a 0.016 percent hit to global demand. This is extremely small on any measure,” the investment bank wrote following the vote.

In that sense, the crash in oil prices seems unjustified. But the Brexit is much more significant for the financial and currency markets than it is for oil supply and demand. And these effects can be just as important for price movements of WTI and Brent. Related: Russia-German Pipeline May Break Europe’s Energy Union

The surprise exit from Europe sparked a global sell off when the voting results were announced, and while the markets regained some lost ground at the end of last week, stock indices opened up again on Monday with heavy losses. Financial instability tends to force oil prices down – at one point on Friday WTI and Brent were down by nearly 7 percent, although the two oil benchmarks retraced some of those losses. But as of midday trading on Monday, oil was down by more than 2 percent again.

Moreover, price movements are also largely dictated by the interaction between global currencies. Since oil is priced in U.S. dollars, any strengthening of the dollar relative to other currencies makes crude more expensive, cutting into demand and pushing prices down. The crash of the British pound over the past two trading days is having this effect. The pound is now down 10 percent from the pre-Bexit vote last week; the euro is down 3 percent. The U.S. dollar index, which measures the currency’s strength against a basket of six major currencies, is up. The dollar jumped by another 1 percent on Monday, to a three-month high.

It is no coincidence that oil prices plunged at the same time as the dollar surged. “We all got it wrong,” Michael Lynch, president of Strategic Energy & Economic Research, said in an interview with Bloomberg. “This is strengthening the dollar, which is bad for commodities."


(Click to enlarge)

British Pound plunged after Brexit vote. GBP:USD exchange rate

The big question is whether these financial and currency effects will persist, or if they will be momentary phenomena, after which oil traders will turn back to the fundamentals. The jury is still out on this question. Related: OPEC’s Pain Is Only Getting Worse As Revenues Continue To Fall

Several top commodities analysts are not so sure that the markets should ignore the Brexit. "We were calling for $44 oil in 2016 on average, now we expect it in the low $40s, roughly $41," Michael D. Cohen, an analyst at Barclays Plc, told Bloomberg. The gloomier assessment continues into next year. “The 2017 forecast has been reduced by $3, from $60 to $57."

Bank of America Merrill Lynch agrees. “A vote for Brexit is a vote against globalization, against the free mobility of people and goods,” Francisco Blanch, head of commodities research at BofA Merrill Lynch, told Bloomberg. “Any reversal in the growth of trade and mobility is bad for the commodities, except gold.”

But the events over the past few days are not all bad for oil. “On a positive note, the vote could delay producers’ investment plans, making them hesitant to bring back investment even with a bounce in prices, especially in the U.S.,” Morgan Stanley concluded in a research note, desperately looking for some reason to be optimistic.

ADVERTISEMENT

Still, there are good reasons to think that even while the fallout from the Brexit could linger, especially because of the market uncertainty that it creates, the usual oil market factors are much more important for crude prices. "For near-term oil, we remain most concerned about product oversupply, China demand, the macro outlook, and the likely return of production," Morgan Stanley concluded.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment
  • Bob on June 27 2016 said:
    If the ultimate price of oil, or any commodity, is going to be dependent on the relationship between supply and demand then I would guess that Brexit volatility probably will not stick.

    A few recent supply and demand factors appeared significant to me. The Saudi indication that oversupply is being reduced. A EIA official on Blomberg indicating current oversupply at half a million bbl per day. The percentage of US production vs refinery runs dropping to around 52% from around 58% last year.

    If current oversupply is well less than a million bbl per day and 2017 demand growth can achieve a million bbl per day and US production nears 50% of refinery intake, I'd guess significantly higher oil prices is certainly doable.

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News