MARKET WATCH: Crude prices dive on results of Brexit vote

Losses sustained by crude oil prices on June 24 as the London and New York markets reacted to Britain’s vote to leave the European Union continued on June 27 amid feelings of uncertainty about Europe’s economic future.

The British pound fell 3.6% vs. the dollar on June 27 to its lowest level since 1985. Because oil trades in dollars, a strengthening greenback makes oil more expensive for buyers using other currencies.

In a statement, George Osborne, Britain’s Chancellor of the Exchequer, made note of “the volatility we have seen and are likely to continue to see in financial markets.”

He assured, however, that while “those markets may not have been expecting the referendum result...the Treasury, the Bank of England, and the Financial Conduct Authority have spent the last few months putting in place robust contingency plans for the immediate financial aftermath in the event of this result.

“Swap lines were arranged in advance so the Bank of England is now able to lend in foreign currency if needed,” Osborne said, adding that “the Bank of England stands ready to provide £250 billion of funds, through its normal facilities, to continue to support banks and the smooth functioning of markets.”

Analysts at financial services firm Raymond James & Associates Inc. have taken a subdued outlook in wake of the immediate economic fallout. “Our initial take is that the oil market is overreacting to short-term currency volatility and still missing the overwhelmingly bullish—and intact—oil fundamentals,” they said in a research note.

“Even if the Brexit spawns a European recession, the fundamental impact on our global oil supply-demand model should not be meaningful, provided that spillover doesn’t lead to a global economic meltdown,” the analysts concluded.  

Separately, the US drilling rig count ended its 3-week-long rebound with a 3-unit decline during the week ended June 24, according to Baker Hughes Inc. data (OGJ Online, June 27, 2016). Oil-directed rigs weighed down the overall count with a 7-unit drop.

Energy prices

The August crude oil contract on the New York Mercantile Exchange dived $2.47 on June 24 to settle at $47.64/bbl. The September contract fell $2.45 to $48.31/bbl.

The natural gas contract for July fell 3.6¢ to close at a rounded $2.66/MMbtu. The Henry Hub, La., gas price was $2.67/MMbtu, dropping a penny.

Heating oil for July delivery declined 6.53¢ to a rounded $1.46/gal. The price for reformulated gasoline stock for oxygenates blending for July decreased 7.85¢ to a rounded $1.53/gal.

The August Brent crude contract on London’s ICE fell $2.50 on June 24 to $48.41/bbl, while the September contract dropped $2.57 to $48.41/bbl. The July gas oil contract fell $14.25 to settle at $435/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes for June 24 was $44.88/bbl, down $1.28.

Contact Matt Zborowski at matthewz@ogjonline.com.

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