Oil prices stabilize after Brexit vote, but refined products glut looms

Oil prices stabilized on Monday as market participants better absorbed the shock of last week’s vote in Great Britain to leave the European Union and recognized the referendum would have little effect on global fuel demand.

Brent crude futures were trading at $48.76 a barrel by 0650 GMT on Monday, up 35 cents from their last settlement.

U.S. crude was up 18 cents at $47.81 a barrel.

Both crude benchmarks had fallen around 5 percent on Friday amid plunging global financial markets as results from a referendum defied bookmakers’ odds to show a 52 percent to 48 percent victory for the campaign to leave a bloc Britain joined more than 40 years ago.

But oil stabilized on Monday as analysts said that Britain’s EU exit would have very little impact on physical oil trading.

“If we assume a 2 percent drop in UK GDP in response to the exit vote, which is on the high end of our economists’ estimates, then UK oil demand would likely be reduced by 1 percent or 16,000 barrels per day, which is a 0.016 percent hit to global demand. This is extremely small on any measure.”” said Goldman Sachs.

Of more concern to the market is a building refined products glut, especially in Asia.

“For near term oil, we remain most concerned about product oversupply, China demand, the macro outlook, and the likely return of production,” Morgan Stanley said in a note to clients.

Chinese refiners have responded to the Asian oil products glut by exporting record amounts of gasoline and diesel fuel into regional markets, eroding refinery profit margins and swelling storage.

As a result, analysts said there is a possibility that refiners dial back production and curb orders for their main feedstock crude oil, potentially weighing on prices.

Despite this, Morgan Stanley added that “the medium term trend towards oil market rebalancing appears in place, barring a recession.” This implies that oil prices would likely remain stable or rise as a supply overhang that pulled down prices by as much as 70 percent between 2014 and early 2016 is gradually brought down, bringing production back in line with consumption.

In shipping, Panama opened the long-delayed $5.2 billion expansion of its shipping canal connecting the Atlantic and the Pacific oceans on Sunday, but the facilities are still too small to handle oil super-tankers like Very Large Crude Carriers (VLCC).

Source: Reuters