Oil market skittish after Brexit vote
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.The fundamentals of the oil market remain unchanged so the market movement is more about the fear of the unknown at this point. It appears overwrought at this point. The world should keep on turning and business should continue to operate which means people will continue to need energy.
Futures dropped 4.9 percent in New York and London, the biggest decline in four 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. “We’re getting big moves now but there will probably be little impact, if any, in the longer term.”
“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.”
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.