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Oil Fundamentals rely on Brexit

By:
Barry Norman
Updated: Jun 28, 2016, 10:19 UTC

Fundamentally nothing has changed since Thursday. Oil supply and demand continue to re-balance toward the point when the global glut of inventories will

Brexit Affects on UK Demand

Fundamentally nothing has changed since Thursday. Oil supply and demand continue to re-balance toward the point when the global glut of inventories will start to retreat meaningfully, either later this year or sometime in 2017. Yes, the U.K. and the EU are about to undergo a vast experiment unlikely to stoke much confidence for the foreseeable future.

crude selloff
Brexit triggered Oil Prices Selloff

Oil gave back gains and turned deep into the red in the European trading session. There was a lack of global economics data today while the EU and the UK remained in the headlines. Crude fell 1.70 to 45.93 and Brent was trading at 47.37.

Oil’s sudden move back down to the mid-$40s will also likely deter at least some U.S. operators from pulling more of it out of the ground. Lower prices will also keep money tight in places such as Venezuela and Nigeria, prolonging and perhaps intensifying their instability. Yes, the logic is grim; but given the primary role supply disruptions have played in the recent oil rally, this could support oil prices in the months ahead.

While the surprise result of the June 23 referendum sent gold surging and oil plunging — and disrupted world stock, bond and currency markets — the U.K. hasn’t mattered much to the commodity world in a long time. Back in the days of colonial empire, everything from tea to copper was priced in the British currency, the pound, making it a global benchmark. That’s no longer the case. Today, almost every major commodity is sold in dollars according to Bloomberg.
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“The fundamentals of demand and supply remain unchanged,” the Paris-based agency said Friday, after the tally of the U.K. referendum showed 52 percent of voters supported leaving the EU. Earlier this month, the IEA said that the global oil glut that had sent prices plunging over the past two years was ending, with supply and demand coming into balance.

“These distractions have little to nothing to do with tightening oil and gas macro fundamentals,” Tudor, Pickering, Holt & Co., the Houston-based oil investment bank, told clients in a note. “Nothing in this result changes the structural realities of solid global demand and challenged supply.”

Meanwhile on the supply side, the amount of Saudi crude in domestic and overseas storage facilities stood at 290.9 million barrels at the end of April, the lowest level since August 2014. The International Energy Agency stated this month that Saudi Arabia could increase production beginning in June to cover increased power needs during the summer.

Oil Small Players
UK Oil Demand is 1.6% Globally

The kingdom’s production has been around 10.2 million barrels since the start of the year. OPEC’s crude oil exports rose only “slightly” last year to 23.60 million barrels per day (bpd), up 1.7 percent from 23.20 million bpd the previous year.

Adding pressure on the commodities market was a soaring dollar, which booked further gains against sterling as well as the euro.

The dollar index, a measure of the dollar’s performance against a basket of major peers, marked its highest level since mid-March on Monday. A stronger greenback makes commodities less appealing for buyers who primarily use other currencies.

Investors expect the uncertainty surrounding the next steps of UK and European officials, to hammer investment and spending decisions, taking a bite out of an already struggling global economy.

Brent prices are down about 7.5% from where they closed on Thursday last week, the day of the referendum.  Some analysts remained relatively upbeat, even in light of the recent losses. A Goldman Sachs analysis that made the rounds on Monday, suggested the hit to global fuels demand was likely to be negligible.

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