BREXIT and its impact on oil market

On June 8, Brent crude oil prices hit $52.51 per barrel. US crude oil prices was $51.53, the highest level since mid-2015. However, a week before the Brexit vote, Brent dropped to as low as $47 a barrel, shedding the gains that had taken it to seven-month highs above $50 in late May.

Financial markets have been worried for months about what a British exit from the European Union would mean for Europe’s future. Results of the British referendum rolled in slowly and eventually showed that Britain voted in favor of exiting the EU. The “leave” group secured around 51.9 percent of the vote. With the result, crude oil prices tumbled almost 5 percent and were at $47.74 per barrel on June 24.

Major oil companies also saw their share prices dive, both because of the broader financial turmoil and because of the huge drop in oil prices.

BP, which says it contributes over $11 billion a year to UK GDP, was among oil companies that saw its share price hit. BP shares (NYSE: BP) dropped 4.13 percent. The company said in a statement that “it is far too early to understand the detailed implications of this decision and uncertainty is never helpful for a business such as ours. However, we do not currently expect it to have a significant impact on BP’s business or investments in the UK and Continental Europe, nor on the location of our HQ or our staff.”

Shell, which produces 13 percent of UK oil and gas, said it would “work with the UK government and European institutions on any implications for us. Our priority is to continue providing reliable, affordable energy to our customers in Europe and the UK.” In early trading Royal Dutch Shell (NYSE: RDS.A) was down 5.35 percent, Statoil (NYSE: STO) was off 6.15 percent,

Brexit and global oil market

The outcome of the Brexit vote was a shock to the system and the result has heightened concerns about the global economy. Some economists say if Brexit hurt the rest of Europe’s economy, the impact on oil demand would widen. Already, slow growth and recession between 2006 and 2015 has sliced about 2 million barrels per day of demand from European and Eurasian economies.

Analyst Wood Mackenzie says it expects impact on the upstream sector to be limited, because it is fully regulated by the UK government. But, the exchange rate may impact costs and margins.

“A sustained depreciation of the pound may benefit upstream operators from a lower cost base relative to the US dollar denominated oil and gas prices,” the firm said.

Europe’s oil demand amounts to about 14 percent of the global total and was unchanged on the year in 2015. But the continent is not the focus of demand growth expectations, with the long-term outlook already viewed as subdued in terms of European oil consumption and growth mainly driven by Asian economies such as China and India.

Industry sources say Brexit may make oil prices more volatile in the short term, but it is unlikely to drastically disrupt the oil market’s fundamental drivers, production and consumption.

However, the fundamentals of supply and demand for crude oil will not appreciably change. Britain is now the world’s 15th largest oil consumer, ranking far behind the United States and China but also behind Brazil, South Korea, Germany, Canada, Iran, Mexico and even Indonesia

Robert Johnston, CEO of Eurasia Group, a political risk research and consulting firm said “The market is mostly focused on what the Saudis are doing and what is happening in the US shale sector. Brexit is less of a factor.”

Market uncertainty

The most significant weight on crude prices is the uncertainty that came with the shock Brexit. The market is not sure how Britain’s decision to leave the EU will impact oil consumption both in the UK and globally, though Britain is not a major consumer of oil, with its 1.6 million barrels per day representing just 1.6 percent of global consumption.

The EU, on the other hand, is a major oil consumer at around 11.1 million barrels per day, which is just behind China’s demand. The concern here is the possibility of contagion, with other EU countries possibly looking to join Britain and exit the group, which could cause economic disruptions that send energy demand lower.

Adding to the uncertainty is how this change will impact oil and gas production in the U.K.’s North Sea. ConocoPhillips, BP, Royal Dutch Shell, Total, and Statoil are among the many producers that operate offshore rigs in the region. One concern is that the UK could pass new laws that have a negative impact on the oil sector.

Brexit and Nigerian oil industry

There about 9 Nigerian companies quoted on the London Stock Exchange Group (LSE) with a collective market capitalisation of $14.2 billion, according to the Nigerian Stock Exchange (NSE). Of the 9 Nigeria-focused companies quoted on the LSE, 6 are oil and gas firms while 3 are major Nigerian banks. Thus, it is expected that its impact on Nigerian oil firms will be limited.

Dolapo Oni, Head Energy Research Ecobank Group in an e-mail response to BusinessDay West Africa Energy said Brexit will have an indirect impact in both positive and negative ways.

“On a positive note the pound is weakening and consequently petroleum product imports from UK refineries will be cheaper. There is also the likelihood of UK developing its trade with Africa more. I think UK is currently less than 5 percent of Africa’s trade.

On a negative note, a more expensive naira means less imports of our crude from the UK. The volatility created by the Brexit has furthered dampened the mood of global investors towards commodities hence oil prices are likely to keep going down also. Thus, as our crude oil production recovers, we may see lower and lower price”, Oni said.

According to US Energy information Administration, as at 2013, UK imports 13 percent of its crude from Nigeria.

FRANK UZUEGBUNAM