Where will oil markets go if Britain votes to leave the European Union (Brexit)? The consensus seems to be that if Britain decides to stay in the EU, the price of oil will follow stock markets and climb. Likewise, if Britain decides to leave, then the stock market will fall and the price of oil will follow.
The reason seems to be entirely based on the perception of risk – Exiting the European Union would alter the status quo rather than maintain it. No one can point to any specific reason why leaving the European Union would have any significant impact on global oil markets other than generalized risk aversion.
Right now the oversupplied oil market seems to be moving towards greater balance and there is no indication that Brexit would introduce any substantive change in the supply/demand balance. Of greater importance to the oil market is whether Iranian oil production will top out at 3.8 million barrels per day, how quickly Canadian oil production returns now that the wild fires have calmed down, whether the Niger Delta Avengers strike another pipeline, and how much gasoline American drivers purchase this summer.
Brexit gives oil speculators a reason to move markets.
The bet in this instance is clear: Brexit means prices drop, no Brexit means prices rise. The presumptions are self-fulfilling. Since the Street thinks Brexit will lower oil prices, it would.
Right now, the polls are mixed. Over the weekend, anti-Brexit seemed to be leading and markets rose accordingly on Monday. New polls on Monday removed that lead and have the two sides tied at 44% each.
For those wagering on the Brexit vote, be prepared for a long night of ballot counting. Unlike other elections, pollsters will not be conducting exit polls. The first results announced will likely be the least indicative of the general population because they will come from the tiny Isles of Scilly and the European oriented Gibraltar. For those whose oil interest is long-term (as opposed to short term speculation), Britain’s Brexit vote will be merely a blip in the oil market. Speculation can move prices a few dollars in each direction, but unless the move is backed by a fundamental change, it will be temporary. Keep your eyes on the more essential issues impacting the oil market this summer.