Oil Caps Biggest Two-Day Loss Since February on Brexit Fallout

(Bloomberg) - Oil capped the biggest two-day drop since February as futures remained volatile after the U.K. last week voted to leave the European Union.

Futures tumbled 2.8 percent in New York, extending Friday’s 4.9 percent slump, the biggest drop in four months. The turmoil in financial markets continued as the pound extended its record selloff while demand for haven assets boosted gold and the dollar. Crude may plunge if the shock of Britain’s vote comes as output rises, Russian Energy Minister Alexander Novak said.

"A chill has come over the market due to the Brexit vote because it brings with it the prospect of slower economic growth and lower oil demand," said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. "The dollar is higher, which is putting pressure on commodities as a whole."

Oil capped a second weekly drop on Friday as prices slid with equities after the U.K. voted to quit the EU following more than four decades of membership. Nigeria continues talks to restore oil output lost to rebel attacks while Canada restarts facilities after wildfires. Saudi Arabia, the International Energy Agency and BP Plc all see a balance emerging between supply and demand. Prices are up almost 80 percent from a decade low in February.

West Texas Intermediate for August delivery fell $1.31 to settle at $46.33 a barrel on the New York Mercantile Exchange. It’s the lowest close since June 16 and caps a 7.5 percent two-day decline. Total volume traded was 20 percent below the 100-day average at 2:51 p.m.

‘Serious’ Drop

Brent for August settlement dropped $1.25, or 2.6 percent, to $47.16 a barrel on the London-based ICE Futures Europe exchange. The contract closed at the lowest since May 10. The global benchmark crude ended the session at a 83-cent premium to WTI.

The Bloomberg Dollar Index, which tracks the currency against major peers, rose as much as 1 percent. A stronger greenback curbs investor demand for dollar-denominated commodities. The Bloomberg Commodity Index, a gauge of 22 raw materials, decreased as much as 0.6 percent.

"If the dollar continues to strengthen you could be talking about $40 oil," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.3 billion. "The dollar is key, even though it doesn’t have a lot to do with supply and demand, at least in the short term. This will make oil more expensive for non-dollar buyers, which will hurt demand long term."

Moving Average

WTI closed below the 50-day moving average, which stands at $46.92, for the first time since February. A settlement below this indicator may signal further price declines to come.

Returning production in Canada and Nigeria, combined with the Brexit result, could mean “the drop in prices in the short term may be serious,” Russia’s Novak said in an e-mailed statement.

A cease-fire with the Niger Delta Avengers is ongoing, allowing repairs to some pipelines, Nigeria’s State Minister for Petroleum Resources Emmanuel Ibe Kachikwu said in Beijing. Output may return to about 2.2 million barrels a day in July amid ongoing talks with rebels, Kachikwu said on Bloomberg television. Production was at 1.8 million barrels to 1.9 million as of two days ago, he said, while predicting prices may end 2016 at $50 to $55 a barrel.

"The combination of a stronger dollar and an increase in Nigerian output gives the market a bearish directional bias," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. "The other shoe may drop when we get reports from the IEA, DOE and OPEC next month that are likely to have cuts in their demand estimates as a result of the British vote."

Oil-market News:

Money managers increased bets on rising WTI prices in the week ended June 21, according to the Commodity Futures Trading Commission. Net-long positions on Brent crude, futures and options combined, fell in the same week, ICE Futures Europe exchange data show. U.S. crude stockpiles probably dropped 2.5 million barrels last week, according to the median of analyst responses in a Bloomberg survey before an Energy Information Administration report on Wednesday. Rosneft PJSC will continue to strengthen its presence in the Chinese market, according to Chief Executive Officer Igor Sechin.

- With assistance from Rakteem Katakey. To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Jim Efstathiou Jr., Carlos Caminada

Copyright 2016 Bloomberg News.

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Brent Crude Oil : $49.24/BBL 1.12%
Light Crude Oil : $47.83/BBL 1.65%
Natural Gas : $2.959/MMBtu 0.23%
Updated in last 24 hours