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Brexit Wins. Now What For Oil?

By Ellen R. Wald, Ph.D.CommoditiesJun 24, 2016 01:51AM ET
www.investing.com/analysis/brexit-wins.-now-what-for-oil-200137932
Brexit Wins. Now What For Oil?
By Ellen R. Wald, Ph.D.   |  Jun 24, 2016 01:51AM ET
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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.

Brexit Wins. Now What For Oil?
 

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Brexit Wins. Now What For Oil?

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Jun 27, 2016 3:16AM ET
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Ellen, thanks for an excellent article. I think the whole "rebalancing" talk, which many big investment entities are trying to sell to the market, are at best bad analysis and most probably at way of cajoling the market into believing the price of oil is on the rise towards next year. Don't believe it, because there is still a large oversupply and don't forget that China is now just about done filling its strategic reserves, which has accounted for 1M bpd demand throughout 2016. That demand stops from one day to the next. My EW analysis points to low $40s this week, low $30s by the end of July and a NEW LOW in August, before returning to the $40s later in 2016, early 2017.
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Jon Ben
Jon Ben Jun 24, 2016 11:57AM ET
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Tremendous buying opportunity in oil now. Did the UK suddenly destroy all its manufacturing, production and transportation? No? then they will continue to both use and produce oil. The market reacts quickly to price in factors that should not up[set them then runs in the opposite direction but eventually fundamentals will prevail.
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Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Jun 24, 2016 9:13AM ET
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Let's do a reader poll. Will oil go down below $45 or back up around $50? Post your prediction here:
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Chew Mark
Chew Mark Jun 24, 2016 9:13AM ET
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Think there should be a meaning correction in July before resuming its uptrend since it has gone up from almost 100% since hitting the low of $26 in Feb. Should find good support at 100D MA at around $42.
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davis bera
davis bera Jun 24, 2016 9:13AM ET
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the OPEC meeting is influential on oil downtrend  move, lets wait fot it to take place, but the downtrend is on going
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denis belov
denis belov Jun 24, 2016 8:37AM ET
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Never would have thought the leave campaign will win. well, right lets hope the EU left over don't tear apart. As for oil, i really don't see the outcome affecting the demand and supply balance. though, i will say there will be lots of panic sells this period because of the uncertainty.
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Karthik Srinivasan
Karthik Srinivasan Jun 24, 2016 8:24AM ET
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Where is US shale oil production growing? Other than the Permian, every other basin is in decline. That's hardly enough to offset continued declines. Saudi Arabia has said they are back to being the swing producer and they've accomplished their mission to take out high cost production. ..The question for oil is whether there will be a demand shock in the EU, but passenger car registrations year to date have been very strong. I'm inclined to believe that oil demand in the EU won't change too much and this event won't affect China or India in isolation. ..
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Kostas Ntinos
Kostas Ntinos Jun 24, 2016 8:19AM ET
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To $ 40 in 2 weeks! .Thanks
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Dr Money
Dr Money Jun 24, 2016 8:19AM ET
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FULLY AGREE with you.
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wilzon lvngren
wilzon lvngren Jun 24, 2016 5:38AM ET
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very insightful article as usual, mr. wald. thanks!
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MELQUIOR CHAVES
MELQUIOR CHAVES Jun 24, 2016 4:14AM ET
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you wish jelly fish... this is just a little distraction for the shorts to cover... oil will keep climbing up on the growing demand.....
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Jun 24, 2016 2:49AM ET
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Oil will dip below 40 then I will load up again Mrs.Wald. There will be fear of GDP growth alone which will worry demand and push prices lower. Speculation play dolly.
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Commodity Specialist
Commodity Specialist Jun 24, 2016 2:39AM ET
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Gold is bullish so you should buy gold today
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