The Oil Outlook PB (Post-Brexit)

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Summary

The outlook for oil should be different than the outlook for U.S. equities, given that oil is a global commodity impacted by global factors on supply and demand.

Thus, the decision of the United Kingdom to separate from the European Union has a more meaningful impact on oil.

Still, the process of divorce is not abrupt, allowing participants to ease the pain for the global energy sector.

In the meantime, positive developments could very well rise in prominence and serve to offset or outweigh the Brexit disruption.

Nevertheless, I view Brexit's impact as a cause for a shift in the trading range of oil lower near-term, until new developments establish a more important role.

The outlook for oil versus for U.S. stocks relative to Brexit is different. U.S. equities in aggregate have some risk to the global environment, but because of its global nature, oil has far more. Thus, it will take oil more time to find confident bidders, and it is likely to trade in a range that marks a shift lower as a result of Brexit.

I apologize to you regarding my mistaken expectation about the vote, but we qualified it and provided risk protection guidance within our report:"Obviously, the risk to this thesis is that the U.K. does vote to leave the E.U., in which case the entire complex would likely unravel quickly. You could hedge against that risk a bit using derivatives or ETFs, but considering my strong conviction for a Bremain vote, I believe the best bet is to stay invested and to have cash on the side to take advantage of any buying opportunity at lower price point, however unlikely near-term." I was wrong and it does not matter if it was because of weather or whatever. However, if you kept that cash at the ready, you can now seek opportunity to put it to smart use gradually. See also this report for my expectation for U.S. equities post Brexit.

The dollar may continue to strengthen over a period of a few days against the British pound and to a lesser extent against euro, keeping pressure on oil. But I actually do not expect it to hold higher through the coming week. Rather, I expect it to steady into the week and gradually ease lower given the now broad market expectation for a U.S. Fed on hold. In this regard, I have a warning for investors: avoid watching too much business television on pivotal days or at least receive it with a skeptical eye, because the mud and sensationalism never gets thicker than on those days. Do not become a victim of it and make emotional decisions. That is because I expect June's employment data to be strong and to lift the dollar some more as the current sensationalism about the Fed never hiking rates fades. Fed commentary and action might surprise fast talking reporters before the end of July.

Beyond the dollar, markets will need time to evaluate the economic impact to Europe and Great Britain, and how the disruption may affect demand for energy. Oil is a global commodity and its price is impacted by events globally. There will be concern also about repercussions to industrial activity in China. Thus, oil prices are likely capped near-term as a result. However, it is also noteworthy that the process of divorce has not even been initiated yet, and that it could very well take as long as two years to finish. That gives the players time to ease the pain of the divorce, which may lead to significantly less economic damage than is expected today.

Nevertheless, I believe, for now, we can think of the impact to oil like a shift downward in the price range, so that the highs will be lower and the lows will be lower, perhaps between $45 and $48 or somewhere around that. The price of WTI futures dropped only to $47.64 on Friday, which is encouraging, but analysts and economists will now be publishing on the potential economic cost and disruption, and how it could play for energy demand. That would add to pressure against oil within the range outlined in my view.

Keep in mind that over time and before Brexit actually happens, positive changes to other factors playing for oil could serve to outweigh this current driving factor. We continue to expect recovery in the U.S. economy and stabilization in China, though my expectations for Europe remain at issue because of my concerns for new terrorism and its costs and the ongoing disruption of the massive immigration wave.

Energy Complex

06-24-16

SPDR S&P 500 (NYSE: SPY)

-3.6%

United States Oil (NYSE: USO)

-4.8%

iPath S&P GSCI Crude Oil (NYSE: OIL)

-5.5%

Energy Select Sector SPDR (NYSE: XLE)

-3.2%

SPDR S&P Oil & Gas E&P (NYSE: XOP)

-5.4%

VanEck Vectors Oil Services (NYSE: OIH)

-5.5%

Exxon Mobil (NYSE: XOM)

-2.6%

Chevron (NYSE: CVX)

-2.4%

BP p.l.c. (NYSE: BP)

-4.8%

Total S.A. (NYSE: TOT)

-8.7%

ConocoPhillips (NYSE: COP)

-5.4%

Royal Dutch Shell plc (NYSE: RDS-A)

-6.4%

Marathon Oil (NYSE: MRO)

-4.4%

Pioneer Natural Resources (NYSE: PXD)

-4.8%

Chesapeake Energy (NYSE: CHK)

-5.8%

Schlumberger (NYSE: SLB)

-3.7%

Click to enlarge

The entire energy complex was impaired Friday, and for good reason. Look for optimism to suffer a setback near-term on this earth shaking event. Oil prices will still hold the price range I outlined, however, given the market's doubt about Fed plans and likely still strong U.S. data. My expectations for the Fed, however, are quite different than the media's were on Friday, so my outlook for oil will likely change at some point in July. You'll want to follow my business column to see my pending reports on the Fed outlook, stocks, the dollar and gold.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.