What Does Brexit Mean For Global Oil and Bunker Prices?

Next week Britain will vote on whether it will leave the European Union

Next week Britain will vote on whether it will leave the European Union, an event already impacting markets across the world.

"Fear of the fallout from a UK exit from the euro zone is throwing global markets into a tizzy," Phil Flynn, an analyst at Price Futures Group in Chicago was quoted by Fox News as saying.

So what will the impact be for global oil and bunker markets?

The short answer is that in the run up to the June 23 referendum, prices are expected to be soft, and should the UK vote to leave the EU, analysts are expecting further downward pressure thereafter.

Indeed, as already witnessed this week, oil markets have been soft and crude futures Thursday closed down for a sixth straight session - the longest downward run since February - and analysts were quick to blame market jitters over a possible Brexit as the root cause.

Matching that trend, Ship & Bunker data shows that IFO380 bunker prices in the primary ports Thursday were down $11.50 to an average of $240.50 per metric tonne (pmt) compared to last Friday's 2016 high of $252 pmt.

A key underlying driver for this softening is the strengthening U.S. dollar, which in turn is being fuelled by worried investors moving cash into the perceived USD safe haven ahead of the vote.

As Dominick Chirichella, senior partner at the Energy Management Institute in New York explains: "The strong U.S. dollar versus most currency pairs is a negative price directional driver for the oil complex."

He expects this situation to continue "until the dust settles and the voting is concluded."

But the investors have good reason to cautious, as the outcome of the vote is far from clear, and a decision to leave could spell bad news for them.

While a poll released Thursday by industry tracker Preqin showed an overwhelming 79 percent of Europe-based hedge funders think the majority of voters will opt to remain in the EU, many others have the "leavers" ahead and gaining momentum.

An Ipsos MORI poll Thursday, for example, puts the "leave" camp 6 points ahead of those voting to stay, while UK news outlet The Independent recently had them 10 points ahead.

The investor concern can be seen in recent stock market movements, with the FTSE 100 Thursday near a four month low as the Bank of England warned an exit from Europe would be trouble for the global economy.

The main concern over "leave" outcome is that it could spark a UK and European-wide recession, which in turn could undermine oil demand.

Accendo Markets' Mike van Dulken notes: "A Fed worried about a Brexit vote means it sees a potential meaningful impact on US and global growth which is bad for perceived demand for oil."

Regular Ship & Bunker readers will be aware there are of course a number of other factors at play, and a "Brexit softening" of oil and bunker prices could easily be thrown into reverse by events in Venezuela or Nigeria.

Conversely, market watchers have also pointed to China as a major factor in crude's downside potential.