Oil tumbled with most commodities amid a global flight from risky assets after the U.K. voted to leave the European Union. Whether the rout lasts depends on how world governments deal with the turmoil.
Futures pared some of their initial losses, which dragged prices down 6.8 percent in New York and 6.6 percent in London, the biggest intraday drop in more than two months. Global equities plunged, while safe-haven assets such as the dollar and gold surged. UBS AG said traders will soon focus again on the re-balancing of the crude market as a global surplus fades, while weighing any lasting impact from the U.K.’s decision on the world economy and oil demand.
“The initial impact is all about risk aversion,” said Michael Wittner, the New York-based head of oil-market research at Societe Generale SA. “We’re getting big moves now but there will probably be little impact, if any, in the longer term.”
Oil slid with industrial metals as the pound plunged and European equities slumped as the U.K. voted to quit the EU after more than four decades. Central banks and governments have warned an exit will hurt economic growth and trigger volatility in financial markets. Almost 52 percent of voters sided with the “Leave” campaign.
West Texas Intermediate for August delivery dropped $2.02, or 4 percent, to $48.09 a barrel at 9:45 a.m. on the New York Mercantile Exchange. The contract dropped as much as $3.41 to $46.70 earlier. Total volume traded was about double the 100-day average.
Risk Aversion
Brent for August settlement fell $2.25, or 4.4 percent, to $48.66 on the London-based ICE Futures Europe exchange. Prices slipped as much as $3.37 to $47.54 earlier. The global benchmark oil traded at a 57-cent premium to WTI.
Crude in New York has advanced more than 80 percent from the lowest level in 12 years in February as disruptions from Nigeria to Canada and falling output in the U.S. eased a global surplus.
“I don’t believe there will be a big long-term impact but in the short term, people are swallowing their gum” in surprise, said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “People don’t want to be long anything at the moment. There’s a flight to safety and the dollar is rising.”
Dollar Strength
Oil prices will likely be affected by a stronger U.S. dollar and slower global economic expansion in the near term, Morgan Stanley said in a note this week. A boost in the currency crimps the appeal of commodities priced in the dollar.
The fundamentals of oil supply and demand remain unchanged after the vote, the International Energy Agency, a Paris-based adviser to industrialized nations, said in a statement. While markets have probably overreacted, “bets on any type of reversal do not sound like a good idea to us until the actual effects” are clear, analysts at consultants JBC Energy in Vienna said in a report.
Saudi Arabia’s crude stockpiles have declined for six months, the longest stretch since the Joint Organisations Data Initiative started tracking Saudi supply levels nearly 15 years ago. The cut is another signal that the realignment of the market is in progress, according to consultants Energy Aspects Ltd.
With files from Bloomberg