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Oil prices drop as U.K. votes to leave EU

Oil prices drop as U.K. votes to leave EU
June 24
15:30 2016

By Nicole Friedman

Oil Prices Hammered by U.K. Vote to Leave EU – WSJ

NEW YORK—Oil prices plunged Friday as the U.K.’s vote to leave the European Union in a nationwide referendum triggered a selloff across markets.

U.S. oil prices recently fell $2.21, or 4.4%, to $47.90 a barrel on the New York Mercantile Exchange, after falling as low as $46.70 a barrel in overnight trading. Brent, the global benchmark, traded as low as $47.54 a barrel and recently traded down $2.36, or 4.6%, to $48.55 a barrel on ICE Futures Europe.

Nearly 52% of the U.K. electorate voted Thursday in favor of leaving the EU, shocking investors and traders around the world who had expected the opposite result. Global stocks tumbled and the British pound sank against the dollar as investors moved money into safe-haven assets like gold.

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Oil prices have wavered in recent sessions as uncertainty about the referendum’s results roiled markets around the world. After dropping to 13-year lows in the first quarter of 2016, oil prices have rallied more than 80% on expectations that the global glut of crude is shrinking. But some analysts say the market remains oversupplied and warn that prices could fall in the coming months.

The WSJ Dollar Index, which tracks the greenback against a basket of other currencies, recently rose 1.9%. A stronger dollar can weigh on dollar-priced raw materials like oil by making them more expensive to foreign buyers.

The referendum result could weaken global oil demand by weighing on European economic growth, said Will Riley, co-portfolio manager at Guinness Atkinson Asset Management Inc., which oversees about $300 million in energy-equity investments.

But Europe isn’t the main driver for oil demand, he said, and Guinness Atkinson still expects international oil consumption to rise strongly this year. Relatively low oil prices have encouraged new demand and emerging economies in Asia continue to grow.

The vote also increases uncertainty for oil production in Scotland’s North Sea, as Scotland’s First Minister said the Scottish National Party would seek to hold a new referendum on secession if Britain chose to leave the EU. The U.K. produces nearly a million barrels of oil a day, or about 1% of global output.

Some market watchers warned that prices could fall further as investors who bet on higher oil prices in recent months close out their bullish bets. “The significantly higher risk aversion is likely to make it hard for prices to regain the $50 per barrel mark in anything like the near future,” said Commerzbank in a note to clients.

Others said the moves would be more transient, as the U.K. vote has little immediate effect on supply and demand in the global crude market.

“The market has what it was looking for—clarity,” said energy-focused investment bank Tudor, Pickering, Holt & Co. “Nothing in this result changes the structural realities of solid global demand and challenged supply.”

Traders are also waiting on weekly U.S. drilling data from Baker Hughes Inc. The number of rigs drilling for oil in the U.S. has risen for three straight weeks, fueling concerns that oil prices around $50 a barrel could encourage U.S. producers to invest in new production and flood the still-oversupplied market with crude.

Gasoline futures recently fell 4.1% to $1.5386 a gallon. Diesel futures fell 4% to $1.4604 a gallon.  Source

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