Monday June 27, 2016
A surprise passing of the British referendum to leave the European Union (EU) caused a steep market loss on Friday, as oil prices lost nearly five percent. It was the biggest single day drop in eight months.
As recent news seemed to indicate Britain would stay put, the popular vote confirming the “Brexit” came as a surprise to the investment community (if not the World). Global equities suffered throughout the day on Friday, and the British pound fell to its lowest level versus the dollar in 30 years (good time for Americans to go on holiday to England now).
The primal fear among oil constituents is that the fifth largest economy in the World (Britain) leaving the EU could cause severe economic failings in other European countries, harming oil demand growth. Friday was a pure “risk off” day, with the dollar and gold rising. Frankly, the weekend came at a good time, giving all market participants time to digest the news.
Last Thursday, oil prices rose and many generally thought that the “Brexit” vote would fail. As early voting results were reported, however, and the “Brexit” seemed more possible and, then, likely even probable, equity markets and oil began a precipitous slide. To wit, from 2200 Thursday through 0100 Friday (during which time the official results were announced), August WTI fell by more than two dollars. Oil did recover a bit before the unofficial market open on Friday morning, but prices were still down over two dollars from Thursday. During the day on Friday, oil was at least stable, making no attempt to recoup losses but not crashing like North American equity markets. In effect, Friday was a “stay away” day. At the settled, August WTI at $47.64 (down $2.47, or five percent).
In the short run, oil supply and demand fundamentals have not changed. The market is predicted to become in balance later this year, as significant supply outages have tightened the balance. The “Brexit”, if it does ultimately come to fruition (over the weekend, it seemed like there was buyer’s remorse resonating within the United Kingdom), will not immediately impact these fundamentals. Monday’s results will go a long way to determine whether Friday was a blip in the recent bullish trend, or the start of a longer, more drawn out bearish oil price era.
Published by PAPCO, Inc. (PAPCO)
PAPCO Newsletter Disclaimer. The information that is published in this newsletter, including the market reports, is derived from trade, statistical, and other sources that we believe are reliable and accurate. However, PAPCO does not guarantee the completeness, accuracy, or reliability of such information, and information should not be relied upon as such. Additionally, PAPCO assumes no responsibility for the material contained in the newsletter and the views expressed therein. Further, PAPCO expressly disclaims any express or implied warranties or guarantees with regard to such information. The information contained in this newsletter and any views expressed herein are provided for your informational purposes only and should not be interpreted in any way as an offer, invitation to make an offer, inducement, or recommendation to buy or sell options contracts, commodity futures, products, or any other type of security.