BREXIT: Impact on Bunker Prices!

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On 23 June 2016, voters in the UK and Gibraltar will vote on whether the UK should leave the EU.  Almost no-one living in the UK today under the age of 50 has any real sense of what it would be like for the UK to operate outside the EU.

For 43 years, EU provisions, policy and philosophy have been grafted onto, or embedded into, UK law.  The closest analogy is a colony gaining independence and deciding what it wants to do, or not to do, with the law and institutions of the departing power.

While a great deal of the focus of the debate to date has been on what will happen on the day of the vote – and whether the proposition will be carried or defeated – in reality, the focus needs to be on what would happen after 23 June 2016 if there were to be a vote to leave.

“Fear of the fallout from a UK exit from the eurozone is throwing global markets into a tizzy,” says Phil Flynn, an analyst at Price Futures Group in Chicago.

What is the impact on the global and bunker markets?

The short answer is that in the run up to the June 23 referendum, prices are expected to be soft, and should the UK vote to leave the EU, analysts are expecting further downward pressure thereafter.

Indeed, as already witnessed this week, oil markets have been soft and crude futures Thursday closed down for a sixth straight session – the longest downward run since February – and analysts were quick to blame market jitters over a possible Brexit as the root cause.

Matching that trend, for IFO 380 bunker prices in the primary ports Thursday were down $11.50 to an average of $240.50 per metric tonne (pmt) compared to last Friday’s 2016 high of $252 pmt.

A key underlying driver for this softening is the fortifying  U.S. dollar, which in turn is being fuelled by worried investors moving cash into the perceived USD safe haven ahead of the vote.

As Dominick Chirichella, senior partner at the Energy Management Institute in New York explains: “The strong U.S. dollar versus most currency pairs is a negative price directional driver for the oil complex.”

He expects this situation to continue “until the dust settles and the voting is concluded.”

But the investors have good reason to cautious, as the outcome of the vote is far from clear, and a decision to leave could spell bad news for them.

Yet, the investors have justifiable reason to cautious, as the result of the vote is a long way from clear, and a choice to leave could spell terrible news for them.

While a poll released Thursday by industry tracker Preqin showed an overwhelming 79 percent of Europe-based hedge funders think the majority of voters will opt to remain in the EU, many others have the “leavers” ahead and gaining momentum.

An Ipsos MORI poll Thursday, for example, puts the “leave” camp 6 points ahead of those voting to stay, while UK news outlet The Independent recently had them 10 points ahead.

The financial specialist concern can be found in late securities exchange developments, with the FTSE 100 Thursday almost a four month low as the Bank of England cautioned a way out from Europe would be inconvenience for the worldwide economy.

The primary worry over “leave” result is that it could start a UK and European-wide recession, which in turn could undermine oil demand.

Accendo Markets’ Mike van Dulken notes: “A Fed worried about a Brexit vote means it sees a potential meaningful impact on US and global growth which is bad for perceived demand for oil.”

There are obviously various different components having an effect on everything, and a “Brexit softening” of oil and bunker prices could easily be thrown into reverse by events in Venezuela or Nigeria.

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SourceSources & References: A&L Goodbody, Ship & Bunker

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