Oil Bulls Face Specter of Market Turmoil on Brexit Aftershocks

EIA's Sieminski: Brexit Calls Oil Demand Into Question
  • WTI crude dropped 4.9 percent on June 24, most since February
  • Money mangers boosted bullish bets ahead of the U.K. vote

Oil bulls could end up road kill following the Brexit ballot.

Crude tumbled as much as 6.8 percent June 24 after U.K. voters decided to leave the European Union. While some analysts said supply and demand still favor rising prices, Britain’s exit means there’ll be a period of uncertainty over Europe’s future, casting a shadow over the market.

“A vote for Brexit is a vote against globalization, against the free mobility of people and goods,” said Francisco Blanch, head of commodities research at Bank of America Merrill Lynch in New York. “Any reversal in the growth of trade and mobility is bad for the commodities, except gold.”

Global equities plunged after the decision, while haven assets such as the dollar and gold surged. UBS AG said traders will soon focus again on the fundamentals of the market as a global crude surplus fades. They’ll also have to weigh any lasting impact from the U.K.’s decision on the world economy and oil demand.

Money managers were bullish in the run-up to the British vote, boosting bets on rising crude prices in the week ended June 21, according to data from the Commodity Futures Trading Commission. West Texas Intermediate rose 0.7 percent to $48.85 a barrel on the New York Mercantile Exchange in the report week. Futures tumbled 4.9 percent on June 24 and slipped a further 2.8 percent to $46.33 on Monday.

"We were calling for $44 oil in 2016 on average, now we expect it in the low $40s, roughly $41," said Michael D. Cohen, an analyst at Barclays Plc in New York. “The 2017 forecast has been reduced by $3, from $60 to $57."

The surprise Brexit outcome moved the greenback, with the Bloomberg Dollar Spot Index climbing 1.8 percent on June 24, the biggest gain since October 2011. A rising U.S. currency curbs investor appetite for dollar-denominated commodities.  Bookmakers’ odds suggested the chance of a vote to leave the EU was less than one in four.

Crude in New York had been on a bull run, climbing more than 80 percent from a 12-year low in February through early June as disruptions from Canada to Nigeria and falling U.S. production eased a surplus. Prices then dropped in three of the last four weeks as Canadian output rose after wildfires that disrupted production were extinguished and the U.S. rig count began to increase.

Re-Balancing Market

“There needs to be a fundamental re-balancing to the market to see sentiment turn bullish and that’s looking unlikely,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $133 billion of assets. “The upside for oil was already limited given the rising rig count,” as well as “the fact that a number of OPEC countries plan to boost oil output," he said.

The Organization of Petroleum Exporting Countries maintained its policy of unrestricted production at its June 2 meeting, and Iran has rejected any cap on output as it restores volumes following the removal of sanctions in January.

Not all analysts are forecasting that the Brexit vote will be bearish for oil. The period of up to two years for negotiations leading to a U.K. exit and the small relative size of the British market may act as a buffer for crude.
 
“Any impact on the global economy should be limited,” said Michael Wittner, the New York-based head of oil-market research at Societe Generale SA. “The biggest impact will be on the U.K. itself.”  

Bullish Bets

Hedge funds’ net-long position in WTI rose by 21,586 futures and options combined to 213,075, the first gain in five weeks, CFTC data showed. Longs, or bets on rising prices, increased by 4 percent, while shorts dropped 10 percent.

In the Brent market, money managers reduced bullish bets by 9,153 contracts in the week, according to data from ICE Futures Europe. Bets that prices will rise outnumbered short positions by 362,765 lots, the London-based exchange said in a report.

In other markets, net bullish wagers on U.S. ultra low sulfur diesel rose 2.9 percent to 16,528 contracts, the highest since July 2014, as futures climbed 1 percent. Net bullish bets on Nymex gasoline surged 88 percent to 7,012 contracts, the biggest percentage gain since November. Gasoline futures increased 4.7 percent. 

Precious metals were the only commodities to rise after the vote as investors flocked to havens. Gold surged 4.6 percent, its biggest one-day gain since September, while the Bloomberg Commodities Index of 22 raw materials fell 1.6 percent.

“We all got it wrong,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “This is strengthening the dollar, which is bad for commodities."

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