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NEWS
Oil futures fell on Monday, with Brent crude settling at a seven-week low, as investors worried about global energy demand and shunned assets perceived as risky in the aftermath of the U.K.’s unexpected decision last week to leave the European Union.
Aftershocks of the so-called Brexit decision, or British exit from the trade bloc, continue to ripple through financial markets, as market participants weigh the possibility of the EU unraveling, which could weigh on the outlook for crude demand. August West Texas Intermediate crude slid $1.31, or 2.8%, to settle at $46.33 a barrel on the New York Mercantile Exchange. August Brent lost $1.25, or 2.6%, to $47.16 a barrel on the ICE Futures exchange in London. Both grades of crude had traded marginally higher in electronic trade early Monday. But that didn’t hold; WTI marked its lowest finish since June 16, while Brent settled at its lowest level since May 10, according to data from Dow Jones. “For the oil market, Brexit is important in the near term, but not so much in the long term unless a global recession is the result,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
Shock waves from Thursday’s Brexit referendum prompted the U.S. dollar and yen to gain ground versus other currencies. A measure of the buck’s strength, the ICE U.S. Dollar Index against a basket of six rival currencies, was up 1.1% Monday. “Brexit is bad for China, due to the Japanese yen rally which is bad for the yuan and the future uncertainty of export volumes to the EU, China’s biggest market for exports,” said Richard Hastings, macro strategist at Seaport Global Securities. When China gets a stuffy nose, oil tends to get all clogged up, too,” he said. Oil prices are also dropping against a backdrop of “massive volumes of crude oil and product inventories,” especially in the U.S., “and then there is the very fast move in the U.S. dollar against the British pound and the euro,” said Hastings. The pound and euro dropped versus the dollar. A stronger greenback makes oil more expensive for traders using other currencies, typically cutting demand and pushing prices down.
On Friday, WTI and Brent oil prices settled nearly 5% lower as Britain’s decision surprised investors, triggering a selling spree across global markets in assets viewed as risky, including stocks and commodities like crude oil. The U.K.’s vote to leave the EU has shaken investor confidence in the region’s economic growth with some fearing it could may lead to copycat reaction in other EU members. Haworth said he doesn’t expect global recession and believes that the market will “pivot in the next week or so back to fundamentals.”
Hastings said that the near-term price risks in West Texas Intermediate crude “point to the lower end of the $40 handle.” But an oil price at that level “is toxic to new drilling in a bunch of onshore areas of the U.S.”