Saudi Arabia: Brexit vote halts upward trend in oil prices
June 30, 2016
The rally in oil prices following January’s 13-year low came to an end after the UK referendum on 23 June. The market did not crash, rather the correction was relatively mild and mostly reflected a wait-and-see approach as investors are still assessing the impact of the Brexit on global demand. The price of the Organization of Petroleum Exporting Countries (OPEC) oil basket traded at USD 44.5 per barrel on 28 June. Although this represented a 42.2% gain over the same day of the previous month, oil prices were still down 24.8% on an annual basis.
While spillovers from the United Kingdom’s decision to leave the European Union were felt in the oil market, they were largely contained and oil prices only receded slightly. Prices fell due to mounting uncertainty regarding the overall impact of Brexit in Britain’s economy and particularly in the Eurozone, a major player in the oil market. Moreover, uncertainty drove capitals to flee to safe-haven assets such as the U.S. dollar. This situation lead to a sizeable strengthening of the greenback, which, in turn, translated into a drop in crude oil prices. Going forward, the Brexit will continue to pose downside risks to oil prices. However, a seasonal spike in gasoline demand in the United States will likely support prices in the coming months.
OPEC pumped 32.36 million barrels per day (mbpd) in May, which was down from the 32.46 mbpd extracted in April. According to the latest OPEC Monthly Oil Market Report, May’s drop in output mainly reflected much weaker production in Nigeria and, to a lesser extent, in Iraq, Libya and Venezuela. On the other hand, Iran, Kuwait and the United Arab Emirates recorded significant production gains in the same month. Saudi Arabia produced 10.24 mbpd in May, which was above the 10.16 mbpd recorded in the previous month.