Oil prices have worst run since February

Traders are eyeing the effect of European output on the supply and demand gap in crude.

Oil prices had plunged by nearly 7 per cent at one point on Friday. Picture: AP/Keith Srakocic.

Oil prices had their largest back-to-back losses by percentage since February as a stronger dollar and haven-seeking investors Monday kept pushing crude into a retreat after Friday’s unexpected choice from UK voters to leave the European Union.

US crude oil for August delivery settled down $US1.31, or 2.7 per cent, at $US46.33 a barrel on the New York Mercantile Exchange. Brent crude, the global benchmark, lost $US1.25, or 2.6 per cent, to $US47.16 a barrel on ICE Futures Europe, its lowest settlement since May 10. US oil also briefly traded at lows not seen since mid-May before a sharp rebound just before settlement.

Oil has been caught in a broader downdraft shocking commodities, stocks and many currencies since Britain’s decision to exit the EU, known as “Brexit,” surprised investors. The vote has shaken investors’ confidence in the stability of the global economy and financial system, pushing them out of riskier assets and into traditional havens like gold and the US dollar, analysts and traders say.

The pound fell further on Monday and sent the US dollar soaring. The Wall Street Journal Dollar Index, which tracks the greenback against a basket of other currencies, recently gained 1.1 per cent. A stronger greenback makes oilmore expensive for traders using other currencies, typically pushing prices down.

The fall is likely exacerbated by how hard investors had been betting on rising prices, traders and a broker said. Oil has had its sharpest rally since the financial crisis, nearly doubling in price since late February as traders bet supply outages around the world and lower US output were easing a huge glut. As they close out or recalibrate the risks in the market, the sell-off can snowball.

“Crude has already come a long way and needed a breather,” said Tim Pickering, president at Auspice, which manages $US300 million. “Brexit is simply an excuse.”

Mr Pickering and several bank analysts said Monday that the factors pushing oil higher in the long term are likely still there. Even if spillover effects from the vote slowed major economies around the world, it would likely reduceoil demand by just 130,000 barrels, or 0.1 per cent of global demand, the bank said. Deutsche Bank had estimated just 100,000 fewer barrels of oil demand a day, compared with outages in Nigeria that are taking 400,000 barrels a day off the market.

“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] sell-off.”

But Goldman and Morgan Stanley did point out a big risk from China. As investors flee to the dollar, the yen and other safe-haven assets, China will be trying to ward off another sudden currency devaluation, Goldman said. Gasoline and diesel demand also slowed further in May, Morgan Stanley said.

The UK vote reduces the chance of a surprise jolting prices higher when the outlook was already fragile because of the risk of oversupply, the Morgan Stanley analysts said. It has pushed many to delay their expectations for a bigger oil-price recovery much deeper into 2017, said Todd Garner, managing partner at hedge fund Protec Energy Partners LLC, which manages $US100 million of assets out of Boca Raton, Fla. He added that he isn’t bullish until then.

“China’s demand is definitely waning,” he added. “It is what’s slowing everything down.”

Gasoline futures lost 3.2 per cent to $US1.4767 a gallon. Diesel futures lost 1.8 per cent to $US1.4292 a gallon.

— Dow Jones newswires