25-06-2016

Brexit has limited impact on oil prices so far: Kemp

oil

Crude oil prices have so far shown only a modest impact from Britain’s vote to leave the European Union on Thursday.

Brent crude futures for the nearest contact to delivery were down by just over $2 per barrel or about 4 percent compared with the previous close at 0900 GMT on Friday morning.

In both dollar and percentage terms the price move was about two standard deviations compared with all one-day price changes since 1990 (tmsnrt.rs/28RMo3n and tmsnrt.rs/28RMrfy).

Far larger moves have been common in oil markets which suggests traders see the impact from the vote as relatively limited, at least for the time being (tmsnrt.rs/28RMB6J and tmsnrt.rs/28RO79a).

Britain consumes less than 1.6 million barrels of oil per day, 1.6 percent of the global total, and the country’s consumption has been static or falling since 2005.

Britain is now the world’s 15th largest oil consumer, ranking far behind the United States and China but also behind Brazil, South Korea, Germany, Canada, Iran, Mexico and even Indonesia (tmsnrt.rs/28RMqIK).

Even if the vote ushers in a period of uncertainty and causes the economy to slow or even contract, the impact on oil demand will be too small to register on a global level.

The more serious impact would be if there is contagion to the rest of the European Union, which consumes around 11.1 million bpd, only slightly less than China.

But Europe’s consumption has also been flat or falling since 2005 so a slowdown or recession in the rest of the European economy would have only a modest impact on global demand.

The really significant threat comes if the turbulence in financial markets and problems in Europe trigger a widespread “risk-off” flight to safe assets and threaten an economic slowdown in the United States and Asia.

So far, the oil market seems to be betting the threat of significant contagion is low, but that assessment could change very rapidly in the next week as the consequences of Brexit become clearer.

Source: Reuters

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