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Brexit impact fades

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Gary Shilling for Bloomberg View suggested oil could drop to $10.

By Ed Crooks: Friday, July 1, 2016

Oil was one of the markets where the initial shock of the UK’s Brexit vote quickly faded. Brent crude was about $51 per barrel as the voters went to the polls last week, and today was trading at about $49.50. 

The 34 per cent rise in oil so far in 2016 has been its best start to a year since 2009, and helped commodities outperform other asset classes over the past six months.

The rise in prices has brightened the mood in Texas, according to a new survey carried out by the Federal Reserve Bank of Dallas. It looks like being a good data source to watch in future.

Not everyone thinks that optimism is well-founded, though. Gary Shilling for Bloomberg View suggested oil could drop to $10.

Signals on the outlook were conflicting. New figures from the Energy Information Administration on US gasoline consumption showed it was not as rampant in April as had been suggested by the faster but more erratic weekly data. Bloomberg Gadfly’s Liam Denning spotted that weak refining margins and high gasoline inventories were signs that perhaps the gas guzzlers’ comeback in the US was not all it seemed.

On the supply side, Reuters reported that some US shale oil producers had found ways to slow the very steep decline in production from their wells. However, the piece warned that the impact of the new slower decline rates on overall US production was for now limited, and sure enough the EIA on Thursday reported a steep drop in total crude output for April. John Kemp for Reuters suggested Brexit would prove no more than “a bump on the road” to the rebalancing of the oil market.

US natural gas prices have been on a tear, rising 30 per cent in June. That has given some producers, including Southwestern Energy, a chance to strengthen their balance sheets.

Rusty Braziel, one of the most thoughtful analysts of the US industry, gave a fascinating interview to Oil & Gas Financial Journal.

As for the impact of Brexit on energy in the UK, there is not much more clarity than there was a week ago. The terms of the divorce will be critical. Sia Partners produced a good, detailed analysis of the possible implications for UK energy security, concluding that power supplies were likely to be the most problematic area. Bloomberg similarly asked “Who will now invest £100bn to keep Britain’s lights on?” and suggested the UK’s North Sea oil industry faced a “worsening investment drought”.

The chief economist of Statoil, which is one of the oil companies with more ambitious diversification plans, warned that the UK’s vote for Brexit was an example of the breakdown in international co-operation that could threaten the effort to address climate change.

The UK government unveiled an “ambitious” target of cutting greenhouse gas emissions by 57 per cent from 1990 levels by 2032, but faced a legal challenge from the Global Warming Policy Foundation, which argued that the policy was based on “the now incorrect assumption that the UK will still be in the EU by 2030.”

With Kiran Stacey and Pilita Clark, I wrote a long-ish piece on why big oil companies are looking at renewable energy again, and why most – but not all – are still making only tentative moves away from fossil fuels. John Kemp argued the likely continued growth of global oil and gas demand meant it was “misleading” to warn oil companies that they risked investing in “stranded assets” that could not be brought into production.

In a sign of the difficulties involved in shifting to renewable energy, China’s wind turbines were revealed by Bloomberg New Energy Finance to be generating less power than their counterparts in the US. Problems include lower quality equipment, sites that are not as windy, and problems connecting the turbines to the grid.

The attorney-general of the US Virgin Islands withdrew the subpoena he had issued against ExxonMobil in support of his investigation of the company’s statements on climate change and its support for advocacy groups.

There’s been a different kind of gas discovery: a Norwegian company has made a world-class helium find, raising hopes that the worsening world shortage can be eased. Helium is essential for medical and other scientific equipment, and nuclear reactors, as well as party balloons.

Other views

Nick Butler Brexit: the impact on UK energy policy

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