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Brexit Wins. Now What For Oil?

Published 06/24/2016, 01:51 AM
Updated 07/09/2023, 06:31 AM
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At the time of writing, it appears that Brexit will be victorious in Britain (editor's note: as of time of publishing, this has been confirmed). The BBC, Sky News, and other news organization have called the election in favor of the “leave” camp.

Futures markets are down across the board, with the Dow looking to open at least 600 points lower. Crude oil futures are down more than 5%, hovering back and forth around $47.00 a barrel.

Fundamentally, the British economy is just too big and too important to the EU for European companies to abandon. When Britain does leave the EU, trade deals will be worked out. The markets are over-reacting to a leave vote because before the votes were counted they over-reacted to polls indicating a remain victory.

For oil markets, the issue is speculation based on instability. This was compounded by the polls and speculators made bets based on the veracity of these inaccurate polls.

Fundamentally, however, little in the global oil market has changed or will change if Britain leaves the EU. This is why the drop in oil prices will not likely last for long. More important to oil prices then the Brexit vote are the following (in no particular order):

  • Growing oil production in the Gulf of Mexico and in some U.S. shale oil areas
  • Increasing oil production from Saudi Arabia
  • Oil storage facility capacity
  • Gasoline use in the United States
  • Electricity use in Saudi Arabia and other Persian Gulf countries
  • Iranian oil production
  • Chinese teapot refinery crude oil use
  • Crude oil demand in India
  • Venezuela’s economic collapse

Fundamentally, the price of oil depends on the fundamentals, which indicate that $50 a barrel is probably overpriced given the amount of oil still in storage globally and growing oil production.

The more important question for the future is whether other European countries like Greece, Portugal, or Spain will follow and what impact that might have for Europe’s economy.

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