A rush toward safe-havens and the sudden surge in the U.S. dollar are dragging on crude oil prices and energy-related exchange traded funds after the unexpected results from the United Kingdom’s referendum on its membership in the European Union.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, declined 2.5% and 2.3%, respectively, on Monday. USO is now trading below both its 50- and 200-day moving averages while BNO fell below its short-term trend line.
Meanwhile, WTI crude oil futures were down 1.1% to $48.85 per barrel and Brent crude was 2.4% lower to $47.3 per barrel.
Crude oil prices were trending lower for the second day in a row after Britain’s decision to exit the E.U., known as “Brexit.” The vote has triggered uncertainty over the stability of the global economy and financial system, weighing on the future growth outlook.
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The oil market continued to slip Monday as the U.S. dollar strengthened – commodities are priced in U.S. dollars and become more expensive to foreign buyers if the greenback appreciates. The U.S. Dollar Index (DXY), which tracks the USD’s movement against a basket of major international currencies, rose 0.59% to 96.48 late Monday.
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Goldman Sachs Group recently warned in a note that China, the world’s second-largest oil consumer and a major driver for global growth, will be trying to ward of another yuan devaluation as investors turn to the USD or Japanese yen and other safe-haven assets, according to the Wall Street Journal.
[related_stories]“The impact on industrial commodity fundamentals of a leave vote is extremely small from the demand side,” Goldman said. “On the supply side, a stronger dollar would lower the cost of production which has likely been priced into markets with (Friday’s) selloff.”
Goldman analysts reminded markets that the Brexit will only have a minor effect on overall oil demand, projecting global consumption to only dip by 130,000 barrels, or just 0.1% of global demand, compared to the outages in Nigeria, which took 400,000 barrels off of markets per day.
Crude’s fall Monday is “still very, very much tied to global markets rather than oil fundamentals, at least for now,” Scott Shelton, broker at ICAP PLC, told the Wall Street Journal. “Fundamentals are not near-term strong enough to get anyone to stand in front of a liquidation selloff.”
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United States Oil Fund