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Oil extends decline as Brexit fallout spurs market volatility

🕐 3 min read

Oil extended declines to trade near $46 a barrel as the market remained volatile after the U.K. last week voted to leave the European Union.

Futures fell as much as 3.7 percent Monday in New York, extending Friday’s 4.9 percent slump, the biggest drop in four months. The turmoil in financial markets continued as the pound extended its record selloff while demand for haven assets boosted gold and the dollar. Crude may plunge if the shock of Britain’s vote comes as output rise, Russian Energy Minister Alexander Novak said.

“A chill has come over the market due to the Brexit vote because it brings with it the prospect of slower economic growth and lower oil demand,” said John Kilduff, partner at Again Capital, a New York hedge fund focused on energy. “The dollar is higher, which is putting pressure on commodities as a whole.”

Oil had a second weekly drop on Friday as prices slid with industrial metals and European equities after the U.K. voted to quit the EU following more than four decades of membership. Nigeria continues talks to restore oil output lost to rebel attacks while Canada restarts facilities after wildfires. Saudi Arabia, the International Energy Agency and BP Plc all see a balance emerging between supply and demand. Prices are up almost 80 percent from a decade low in February.

West Texas Intermediate for August delivery fell $1.71, or 3.6 percent, to $45.93 a barrel at 1:30 p.m. on the New York Mercantile Exchange. The contract touched $45.90, the lowest since June 17. Total volume traded was 22 percent below the 100-day average.

Brent for August settlement dropped $1.50, or 3.1 percent, to $46.91 a barrel on the London-based ICE Futures Europe exchange. The contract reached $46.73, the lowest since May 11. The global benchmark crude traded at a 98-cent premium to WTI.

The Bloomberg Dollar Index, which tracks the currency against major peers, rose as much as 1 percent. A stronger greenback curbs investor demand for dollar-denominated commodities. The Bloomberg Commodity Index, a gauge of 22 raw materials, decreased as much as 0.5 percent.

“If the dollar continues to strengthen you could be talking about $40 oil,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.3 billion. “The dollar is key, even though it doesn’t have a lot to do with supply and demand, at least in the short term. This will make oil more expensive for non-dollar buyers, which will hurt demand long term.”

WTI is heading for the first close below the 50-day moving average since February. A settlement below this indicator, which stands at $46.91, could signal further price declines to come.

Returning production in Canada and Nigeria, combined with the Brexit result, could mean “the drop in prices in the short term may be serious,” Russia’s Novak said in an e-mailed statement.

A cease-fire with the Niger Delta Avengers is ongoing, allowing repairs to some pipelines, Nigeria’s State Minister for Petroleum Resources Emmanuel Ibe Kachikwu said in Beijing. Output may return to about 2.2 million barrels a day in July amid ongoing talks with rebels, Kachikwu said on Bloomberg television. Production was at 1.8 million barrels to 1.9 million as of two days ago, he said, while predicting prices may end 2016 at $50 to $55 a barrel.

“The combination of a stronger dollar and an increase in Nigerian output gives the market a bearish directional bias,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The other shoe may drop when we get reports from the IEA, DOE and OPEC next month that are likely to have cuts in their demand estimates as a result of the British vote.”

Oil-market news:

–Money managers increased bets on rising WTI prices in the week ended June 21, according to the Commodity Futures Trading Commission. Net-long positions on Brent crude, futures and options combined, fell in the same week, ICE Futures Europe exchange data show.

–U.S. crude stockpiles probably dropped 2.5 million barrels last week, according to the median of analyst responses in a Bloomberg survey before an Energy Information Administration report on Wednesday.

–Rosneft PJSC will continue to strengthen its presence in the Chinese market, according to Chief Executive Officer Igor Sechin.

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