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Page added on June 21, 2016

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What happens to oil if there’s a Brexit?

If the U.K. public votes to leave the European Union (EU) on Thursday, Societe Generale’s head of oil market research predict the price of would fall — but not for long.

In the week leading up to the vote, global markets are firmly focused on the British vote on EU membership with a positive reaction seen after several polls at the weekend showed that support for the remain vote had gained momentum. As a result, European stocks surged 3.3 percent Monday morning, sterling strengthened against the dollar and oil prices rallied with Brent crude trading up 88 cents at $50.05 a barrel and U.S. West Texas Intermediate up 82 cents at $48.78 a barrel.

Oil prices declined last week when the polls had shown the Leave campaign in the lead. With markets on tenterhooks, Michael Wittner, global head of Oil Market Research and head of U.S. Commodities Research at Societe Generale noted that risk aversion in oil markets was heightened ahead of the vote.

A worker looks out onto the weather deck of the Armada gas condensate platform, operated by BG Group Plc, in the North Sea, off the coast of Aberdeen, U.K.

Simon Dawson | Bloomberg | Getty Images
A worker looks out onto the weather deck of the Armada gas condensate platform, operated by BG Group Plc, in the North Sea, off the coast of Aberdeen, U.K.

“In recent weeks, markets have been concerned about negative interest rate policies in various countries, and a seemingly fragile global economy. However, last week, the focus on Thursday’s U.K. referendum on EU membership intensified. This has contributed to – and perhaps driven – overall risk-aversion in recent days, which has definitely weighed on the global oil complex,” Michael Wittner said in a note on Monday.

“If there is a Brexit, the negative pressure on oil prices would be driven by risk aversion, not fundamentals,” he added.

“In our view, the dramatic shift from an oversupplied to a balanced market – which is currently taking place – would overwhelm the small fundamental impact of slightly weaker demand due to currency effects. While a Brexit may result in further sentiment-driven price declines at the front of the crude forward curve of around 5 percent (order of magnitude), we would expect any such weakness to be temporary,” he said.

While the chance of a Brexit is looking dimmer now than in recent weeks, the polls are still tight and the margin for error is a potential upsetting factor. The result could hinge on voter turnout among older and younger voters who, at a very general level, tend to fall into the leave and remain camps, respectively.

 

While the outcome of a Brexit is largely unknown, given that it would be an unprecedented event for Britain and the EU, Wittner said that oil markets would react immediately and that it would be difficult to trade.

“If there is a Brexit … we would expect a further wave of risk-aversion, which would clearly be short-term bearish for crude oil at the front of the forward curve. We have seen such waves several times in recent years, with notable examples of catalysts including developments in China (the equities and currency markets), the euro zone (Greece), and the U.S. (increases to the debt limit).”

“Our view is that Brexit-related risk-aversion is, and will be, no different; this means that it will be difficult to trade, first because the magnitude and duration of the wave(s) are impossible to predict, and second – and perhaps more importantly – it is hard to know how much a Brexit will be priced in by the time voting takes place and results are released.”

Oil prices are seeing a nascent recovery as a supply and demand imbalance shows signs of coming to an end. Demand at a global level is predicted to grow while supply weakens, supporting prices after two years of declines. Wittner said that, Brexit or none, “the combination of healthy demand and declining supply should result in a global market that will be roughly balanced in the second half of 2016.”

“The long awaited re-balancing has been bullish for oil prices and we expect this to continue next year. While we are cautious near-term (Q3 16 and Q416) due to supply returning from disruptions and still-high stocks, if there is a Brexit, the key takeaway is that the shift from an oversupplied to a balanced market will, in our view, overwhelm the small fundamental impact of slightly weaker demand due to currency effects.”

The bottom line? “The negative impact of a Brexit on oil prices would be driven by risk aversion, not fundamentals,” Wittner said.

CNBC



3 Comments on "What happens to oil if there’s a Brexit?"

  1. Apneaman on Tue, 21st Jun 2016 2:08 pm 

    Things are going great and the’re only getting better………….

    Negative interest rates are coming to America

    “Well, that didn’t take long! Negative Interest Rate Policy appears to be a gift that keeps on giving.

    Just a little while ago I wrote that, in essence, if the Federal Reserve wants to keep the financial party going a little bit longer, it will have to continue lowering interest rates to below zero, as this is the only way to keep broke debtors alive and prevent the gigantic debt bubble from imploding. And now we find out that the Federal Reserve has resolved any legal impediments (such as the Federal Reserve Act) that have kept it from doing just that.”

    http://cluborlov.blogspot.ca/2016/06/negative-interest-rates-are-coming-to.html

    The future’s so bright…

    https://www.youtube.com/watch?v=8qrriKcwvlY

  2. Ralph on Wed, 22nd Jun 2016 6:05 am 

    The Brexit vote is still too close to call. The bookmakers area calling a Remain result, but this is based on the total money betting on the result, not the opinion polls. The Leave poll ratings surged about 10 days ago, but the murder of a popular left wing politician by a lone ultra-nationalist swung opinion back to Remain. Now polls say the balance is still held by undecided voters. Good weather would help the Remain vote, as that demographic is seen as lee motivated.

    The last general election was called completely wrong by all the opinion polls, and there will be no ‘exit poll’ on this vote, so the conspiratorially minded are already calling the result electoral fraud even before the vote happens. I expect the result to be very close, and I expect the losing side to contest it in the courts regardless.

    I will vote Remain.

  3. Hello on Wed, 22nd Jun 2016 8:23 am 

    How sweet that would be. To see this evil EU crumble.

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