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No Time to Head for Exits

By Robert Rapier on June 28, 2016

Markets don’t like uncertainty, so it wasn’t a huge surprise that oil prices initially dropped by 5% in the wake of the UK’s unexpected vote last week to leave the European Union. One impact of the vote was a substantial strengthening of the dollar against many other currencies. Because the majority of the world’s oil trade is conducted in dollars, countries that have seen the dollar strengthen against their currencies will find that oil has become more expensive. That could potentially curb demand, and hence lower prices.

But would the departure of the UK from the EU have a longer-term impact on the oil market?

The UK has the world’s 5th-largest economy based on its GDP, and is second in the EU behind Germany. In 2015 the UK consumed 1.56 million barrels per day (bpd) of oil, which ranked it 14th among all countries for oil consumption, and third in the EU behind Germany and France.

In the late 1990s the UK was among the world’s top 10 producers of oil and natural gas (ranking as high as #4 globally for gas). The bulk of the UK’s oil and gas comes from the North Sea, but production has fallen sharply over the past 15 years. According to the BP Statistical Review, the

UK’s oil production peaked in 1999 at 2.9 million bpd, but has since been in decline. Production in 2015 had fallen to 965,000 bpd (1% of the world’s total crude production).

Thus, the UK is neither a major consumer nor producer of oil, so even if it were to exit the EU that would be unlikely to shake up the world’s crude markets. Over time it is possible that this could lead to an economic slowdown in the UK and in the EU, which could affect future demand growth. However, crude oil demand in the UK and the EU has been in decline already for a decade. Today European crude supply and demand have a much smaller effect on the world markets than is exerted by Asia Pacific, for instance.

Also important to note is that this exit would not occur immediately, and in fact may not happen at all. There are many anecdotal tales of buyer’s remorse among those voting to leave — following steep declines in the UK markets — and this wasn’t a binding referendum. There are plenty of hurdles remaining before the vote becomes an actual exit from the EU.

If the exit does take place eventually (as seems likely), it will certainly cause economic losses, but it is hard to envision a scenario in which it has a major impact on the energy sector.     

We don’t foresee making portfolio changes in The Energy Strategist as a result of this vote. In fact, any weakness over the next few weeks should be viewed as a buying opportunity given the limited sustained impact we expect this issue to have on the global oil markets.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

 


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