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Page added on June 29, 2016

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Robert Rapier: No Time to Head for Exits


Markets don’t like uncertainty, so it wasn’t a huge surprise that oil prices initially dropped by 5% in the wake of the UK’s unexpected vote last week to leave the European Union. One impact of the vote was a substantial strengthening of the dollar against many other currencies. Because the majority of the world’s oil trade is conducted in dollars, countries that have seen the dollar strengthen against their currencies will find that oil has become more expensive. That could potentially curb demand, and hence lower prices.

But would the departure of the UK from the EU have a longer-term impact on the oil market?

The UK has the world’s 5th-largest economy based on its GDP, and is second in the EU behind Germany. In 2015 the UK consumed 1.56 million barrels per day (bpd) of oil, which ranked it 14th among all countries for oil consumption, and third in the EU behind Germany and France.

In the late 1990s the UK was among the world’s top 10 producers of oil and natural gas (ranking as high as #4 globally for gas). The bulk of the UK’s oil and gas comes from the North Sea, but production has fallen sharply over the past 15 years. According to the BP Statistical Review, the

UK’s oil production peaked in 1999 at 2.9 million bpd, but has since been in decline. Production in 2015 had fallen to 965,000 bpd (1% of the world’s total crude production).

Thus, the UK is neither a major consumer nor producer of oil, so even if it were to exit the EU that would be unlikely to shake up the world’s crude markets. Over time it is possible that this could lead to an economic slowdown in the UK and in the EU, which could affect future demand growth. However, crude oil demand in the UK and the EU has been in decline already for a decade. Today European crude supply and demand have a much smaller effect on the world markets than is exerted by Asia Pacific, for instance.

Also important to note is that this exit would not occur immediately, and in fact may not happen at all. There are many anecdotal tales of buyer’s remorse among those voting to leave — following steep declines in the UK markets — and this wasn’t a binding referendum. There are plenty of hurdles remaining before the vote becomes an actual exit from the EU.

If the exit does take place eventually (as seems likely), it will certainly cause economic losses, but it is hard to envision a scenario in which it has a major impact on the energy sector.

We don’t foresee making portfolio changes in The Energy Strategist as a result of this vote. In fact, any weakness over the next few weeks should be viewed as a buying opportunity given the limited sustained impact we expect this issue to have on the global oil markets.

Investing Daily

7 Comments on "Robert Rapier: No Time to Head for Exits"

  1. Anonymous on Wed, 29th Jun 2016 9:09 pm 

    The uK ‘economy’ may be large (on paper), but it shares many of the attributes of its masters economy, amerika. IE, largely based on fraud, war, and financial ‘services’, a parasitic and non-productive sector, if there ever was one. Germany, produces actual goods and services, high-quality ones. Britain? not so much. Leave or stay, Britain’s days are numbered, economically speaking. It could well be Britain collapse (economically) long ago and its just a dead man walking at this point.

    North Seas best days are long behind it, and it’s not commonly acknowledged how badly the resource was squandered and mismanaged, even in its heyday, though the signs are easy enough to see if one cares to look. But that’s all exhaust out the tailpipe now. There is no North Sea V2.0 coming down the pipe to rescue Britain from its own negligence, brexit or no.

  2. Survivalist on Wed, 29th Jun 2016 10:45 pm 

    IMHO UK will the first western industrial nation to collapse. Kunstler has often cited Japan as being his prediction for first ‘westernized’ industrial nation to collapse but I think UK will beat them to it.

    So far the list of failed states includes Afghanistan, Somalia, Yemen, Iraq, Syria, El Salvador, Guatemala, Honduras, Ukrainian, Egypt, Libya, and numerous other African states. Soon to be added to the list will be Greece, UK, Venezuela, Argentina, Ecuador, Jordan, Uzbekistan and many more.

  3. Northwest Resident on Thu, 30th Jun 2016 1:14 am 

    “a buying opportunity…”

    Only as long as the central banks keep reflating the “markets” with fresh trillion$ in debt. If you know the major players (FED, BOJ, PBOC, EU) aren’t going to let the market drop, that they’re ready able and willing to pump it back up whenever natural forces start dragging it down, then sure, there will be buying opportunities. Question is, how much longer can that go on? My guess is not much longer. Better question: At what point does a sure-shot buying opportunity suddenly become a major loss? Answer: At any time. Gamble wisely with those buying opportunities.

  4. Davy on Thu, 30th Jun 2016 5:59 am 

    I don’t care for Soros for a variety of reasons but he is spot on with the slow motion financial crisis and the acceleration it will see from Brexit. Don’t be fooled that nothing happened yet. This is a slow boil that just got turned up a notch. The uncertainty and disruption Brexit is causing is doing its dirty work.

    Everything financial now is about underlying deflation and debt. As it deepens more and more financial decay and dysfunction will develop. The decay is in balance sheets with bankruptcies and layoffs. With the Central banks it will be dysfunction. The central banks are unable to deal with deflation because they refuse to allow a severe recession do its work. Maybe they understand a severe recession will mean the end of our global system.

    “Soros Says Brexit Has ‘Unleashed’ a Financial-Markets Crisis”

    “Britain’s decision to leave the European Union has “unleashed” a crisis in financial markets similar to the global financial crisis of 2007 and 2008, George Soros told the European Parliament in Brussels. This has been unfolding in slow motion, but Brexit will accelerate it. It is likely to reinforce the deflationary trends that were already prevalent,” the billionaire investor said on Thursday.”

  5. Bystander on Thu, 30th Jun 2016 6:36 am 

    Soros is not an elected official nor a head of state, yet this “investor” is allowed to address European Parliament.

    Soros is US deep state. He and his group own the place… until they no longer do.

    They are not going to survive the internet, Russian-Chinese alliance, Brexit, rise of European populism, rise of Trump.

  6. Bystander on Thu, 30th Jun 2016 6:44 am 

    The Brexit momentum is rapidly losing steam. Now Boris Johnson, the buffoon who was the figurehead behind Leave, has announced he will not run for PM, that’s possibly going to be Theresa May, a closet Remainer who laid low during the campaign.

    Several sources have said that it remains to be seen if Brexit will really happen. I fear they might be right.

  7. Northwest Resident on Thu, 30th Jun 2016 8:46 am 

    “Maybe they understand a severe recession will mean the end of our global system.”

    No doubt.

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