Brexit Putting A Temporary Stop To Oil's Rise - Oil Markets Daily

| About: The United (USO)

Summary

Brexit poll increased.

Concerns over Brexit routs global markets.

NDA playing the stronger hand.

Brexit

Similar to the Scottish independence referendum in 2014, we expect the Brexit to be forgotten just like the US debt ceiling in 2013 and other useless yet dramatic macro headlines.

Bloomberg has so far kept track of the recent poll statistics, and the numbers are close.

Click to enlarge

Global markets are scared of the recent polls, to say the least. S&P 500 was down 0.81% while the Nasdaq led the way again declining 0.94%. Oil markets weren't spared either as concerns about global growth pushed prices down by 1%.

All in all, the markets concern (this time) is no different from when it was scared about the Greece reform, or the US debt downgrade. However, if Great Britain was to leave the EU on June 23rd, the cascading effects on the global economy could be more than meets the eye.

An exit could spell trouble for investor confidence in the EU, and some could decide to yank out assets in droves. The liquidity run could potentially have rippling effects across global markets. While we are still confident that the Brexit won't happen, the market certainly thinks the likelihood has increased.

Looking at the chart above, it's easy to see that the people that want to exit the EU are increasing, while the "remain in EU" people are losing.

This is certainly something to watch in the days ahead. We are just 9 days away from the referendum, and that day could either be VERY positive for global markets or VERY negative. Either way, it should be very volatile going forward.

Nigeria and the NDA

In a press statement released yesterday, the Niger Delta Avengers (NDA) wants some form of negotiations with the international oil companies (IOCs) and the Nigerian government. The terms, while unknown, could be for Nigeria to increase spending towards the Niger Delta region.

The interesting tad-bit about all this is that the NDA threatened that if the talks do not go as how they wanted, they will begin to attack the vessels that carry the crude.

Pure economics 101 and any accounting class would teach you that if the price of oil is at $50, and the government relies on it for revenue, any additional expenses (via new security contracts) would greatly idle Nigeria's recovery. We are being generous here and assuming that Nigeria can even reward these new contracts, but just how will the President of Nigeria convince its people that he's doing the right thing?

Does this open up to other militant groups that want to terrorize the IOCs? Given that the government is willing to negotiate with them, why can't they just continue to terrorize to ask for more?

We continue to see the Nigeria supply outage to be much longer than people expect. While on the surface the NDA is open to negotiation, the NDA is playing their cards extremely well. By going into the negotiation, they can sense just how desperate their opponents are. The right tactic is to reveal a little bit of what you desire, and quickly pull back and pursue the attacks with more ferocity. That way the Nigerian government, now knowing full well what the NDA wants, would increase the offer, giving the NDA even more leverage.

There are currently estimates we've seen that pin Nigeria's oil production around 700k b/d after NDA's recent attacks. Oil prices have moved lower on Brexit concerns, but if the Nigeria situation worsens, we think prices will quickly rebound.

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