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Oil Prices and the Brexit: What Just Happened

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By Matthew Dilallo: 24 June 2016

What: Crude prices tumbled on Friday after Britain’s stunning decision to leave the European Union. By mid-afternoon, oil was down 4.5% and back below $50 a barrel. The sell-off washed over into oil stocks, with British giants BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B) both following crude downward by more than 5% as of 12:30 p.m. EDT.

Those moves, however, were tame compared to the sell-offs of other European oil stocks, with Statoil (NYSE:STO) and Total (NYSE:TOT) down nearly 6% and 9%, respectively. Even large independent U.S. oil companies were taking it on the chin, with ConocoPhillips (NYSE:COP) just one among the many oil stocks sliding in parallel with the price of crude.

So what: Aside from being spooked by the unexpected outcome of the U.K.’s referendum on the EU, the most significant weight on crude prices today is uncertainty. The market is not sure how Britain’s decision to leave the EU will impact oil consumption both in the U.K. and globally. Britain is not a major consumer of oil, with its 1.6 million barrels per day representing just 1.6% of global consumption. The EU, on the other hand, is a major oil consumer at around 11.1 million barrels per day, which is just behind China’s demand. The concern here is the possibility of contagion, with other EU countries possibly looking to join Britain and exit the group, which could cause economic disruptions that send energy demand lower.

In addition to those concerns, companies operating in Britain and Europe are now facing the question of what to do now that Britain will soon be out of the EU. This change could make it harder for multinationals to find employees, which could cause some producers to relocate operations out of Britain. That said, BP has already pledged that it will maintain its headquarters in London despite the vote. Notwithstanding this promise, BP and its rivals could now have much more trouble shuffling employees among international locations. For example, European-based Total and Statoil could potentially be unable to relocate staff efficiently from their U.K. operations to their other sites across the globe once the U.K. is officially no longer part of the EU. 

Also adding to the uncertainty is how this change will impact oil and gas production in the U.K.’s North Sea. ConocoPhillips, BP, Royal Dutch Shell, Total, and Statoil are among the many producers that operate offshore rigs in the region. One concern is that the U.K. could pass new laws that have a negative impact on the oil sector. Legislative changes could, for example, force ConocoPhillips to part with its North Sea assets,   though it only recently rejected a bid for them. Nor would it be a surprise if the Brexit decision caused energy companies to hold off on new investments in the region until there is more clarity about what the change will mean for the sector.

Friday’s slump in both crude oil and the global markets boils down to uncertainty. Not only were world markets not expecting this outcome, but it is a result that opens up a whole new world of change. Fear about what comes next could weigh on crude prices for a while. 

Now what: The outcome of the Brexit vote was a shock to the system. As such, it will take the markets some time to adjust to the new normal. That said, as long as there isn’t any fundamental erosion in oil demand, this decision is not likely to have any real, long-term impact on the oil market.

Matt DiLallo owns shares of ConocoPhillips. The Motley Fool recommends Statoil and Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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