Brexit Stokes Anxiety, Oil Futures Fall

NEW YORK (DTN) -- New York Mercantile Exchange oil futures ended lower Friday afternoon ahead of the weekend break in response to a historic vote by the United Kingdom to quit the European Union.

The win for Brexit was confirmed by the kingdom's electoral commission and Prime Minister David Cameron, who also tendered his resignation from office effective in October. The exact political and economic fallout from the referendum are yet to be determined but there's potential for recession in Britain and elsewhere as turmoil grips global financial markets, said analysts.

"It will take a while for things to settle," said Tom Bentz, head of energy derivatives at ABN AMRO. "We are in for a period of volatility for a while. As long as we keep seeing these front-page [dire] stories there'll be flight to quality, the dollar will keep strengthening, which will, in turn, keep pressure on oil futures. There will be an impact on demand, but we won't know the extent for some time."

Others agreed.

"We don't know what to do next," said analyst Phil Flynn at Price Futures Group. "A lot of people are nervous. We are not seeing people stepping in to buy yet. We are cautiously optimistic but the sell-off is huge in currencies. If we don't get the confidence back, it will be very bad next week."

At settlement, NYMEX August West Texas Intermediate crude oil futures were down $2.47 or 5% at $47.64 bbl, off a one-week spot low of $46.70 while down 34cts for the week.

The August Brent contract on the IntercontinentalExchange lost $2.50 or 5.0% to a $48.41 bbl settlement, off a one-week low of $47.54 while down 76cts for the week.

In products trade, NYMEX July ULSD futures tumbled 6.53cts or 4.0% to $1.4553 gallon at settlement, off a one-week low of $1.4384 and won $2.64 for the week. July RBOB futures tumbled by 7.85cts or 4.7% to $1.5250 gallon, off a four-day low of $1.5170 while up $1.97 for the week.

On Wall Street, major U.S. stock indices plummeted on investor flight to safety with the Dow Jones Industrial Average diving 600 points. In currency trade, the British sterling pound tumbled 8% to a 31-year low while the dollar rallied to the highest level since March 16 and the euro fell to an eight-year low.

The U.K. now has two years to negotiate with the EU the terms of its separation, but the political, economic and market consequences are only starting to be realized. There's the potential for fracturing of Europe and the U.K., which could hurt economic growth, analysts said.

Scotland, which voted in Thursday's referendum to remain in the EU, is calling for a second referendum for its independence from the U.K, and Northern Irish nationalists are also calling for their referendum to determine their future in relation to other U.K. nations.

Policymakers are trying to deal with the fallout of the U.K. vote. Bank of England Governor Mark Carney is providing 250 billion sterling pounds or $345 billion to ease liquidity problems that are likely to result from the referendum. Switzerland moved to stabilize the franc.

In the U.S., the Federal Reserve said it's prepared to provide dollar liquidity after the Brexit vote, and analysts said there's no chance now of a hike in interest rates this year as the central bank works to stave off the impact of the British decision.

George Orwel can be reached at george.orwel@dtn.com

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