Friday, June 24, 2016

Brexit – too soon to talk about long term impact

Brexit. If you are on social media or flipped through the channels on your television, catching glimpses of news reports, you may have seen that term dominating headlines. But what does it mean?

Brexit is short for “Britain exit,” referring to the referendum that determined whether Britain would remain in the European Union or leave. It was put to a vote on June 23. Voters decided to leave the union.

Whether the outcome is good or bad is a matter of politics that I will leave to the individual to decide. However, there are some economic consequences that are less subjective, and we’re seeing them just hours after the voting results were made official.

At the opening of the stock market on June 24, the Dow Jones plummeted nearly 500 points almost immediately and closed on Friday down more than 600 points.  Oil investors reacted in a similar fashion, with a $2 drop in both WTI and Brent oil futures early in the session.

As The Wall Street Journal pointed out, global stocks plummeted and the British pound sank against the dollar (lowest level since 1985) leaving investors to move money to safe-haven assets like gold. In the past week, oil prices have rallied, with analysts speculating incorrectly that Britain would remain in the EU.

However, that same WSJ article also noted that despite a potential weakening oil demand stemming from uncertainties of European economic growth, oil prices may not take a nosedive. Low oil prices have driven up demand globally, and Europe is not exactly the driving force behind that demand. Emerging markets in Asia are large contributors to increased oil demand.

According to IndexMundi, the United Kingdom consumes less than 2 percent of the world’s crude oil supply at 1.5 million barrels per day (1.5 mb/d). Conversely, the U.S. consumes nearly 19 mb/d (21 percent), China at 10 mb/d (11.2 percent), Japan at 4.5 mb/d (5 percent) and India at 3.5 mb/d (4 percent).

Analysts are predicting that Brexit will cause the U.S. dollar to surge in value as investors move money out of the British and European markets and into U.S. assets. However, an increase in the dollar could also decrease the demand of U.S. exports such as oil and other commodities.

“Should stock markets continue to decline, there is the risk of a ‘negative wealth effect’ impacting demand for both gasoline and diesel,” said Tom Kloza, global head of energy analysis for Oil Price Information Service. “But we’d have to have some more scary down days for that to happen.”

Kloza summed it up best by saying “it’s a little bit too soon to say what the long term impact may be.”