Equity markets around the world are taking an additional bruising, except for the land of the rising sun. WTI is down to $46.10 and Brent is down below $47.
The S&P 500 and the Nasdaq are also selling off aggressively, with both down over 1%.
The Brexit turnout has not been kind to global risk assets. Markets rallied prior to the Brexit result in anticipation of "remain" winning, but the opposite turned out to be true. Market participants that anticipated "remain" to win were blindsided by the positioning, and even George Soros was long the pound going into the vote.
Brexit's implications for the global economy are still uncertain. One thing we know with some degree of confidence is that the U.S. and Canada's natural gas (NYSEARCA:UNG) space will not be impacted as local supply and demand dictates the direction of the price. Oil, however, is subjected to immense amount of global GDP scrutiny. Goldman Sachs doesn't believe that Brexit will have much of an effect on oil prices, but near-term currency movements are slapping oil prices around along with global risk assets.
The likelihood of Brexit having a meaningful impact on oil prices in the next few years remains low. But as we said in our last article, it's the perception of risk and not the actual risk that dictates short-term price movements.
Last night, China announced one of the largest yuan devaluations to date. The yuan, similar to the pound, has served as a risk gauge for global assets. Devaluation was needed as the USD spiked after Brexit prevailed, and investors flocked to global safe-haven assets like gold and U.S. treasuries.
There are a lot of concerns with regard to the healthiness of the Chinese economy. Any black swan events out of China could materially shift global GDP to the downside. Oil bulls have to pay close attention to the situation in China to gauge whether demand growth will remain strong. That's one area that's still up for debate in the oil bull vs. bear argument. The facts illustrate that global oil production is in a decline, but will demand be there in the next few years?
We didn't expect Brexit to happen, and we're still somewhat in the camp that believes the actual execution of Brexit will be delayed. Brexit served as a wake-up call for those expecting rosy results, and sometimes even the unlikely could happen. We still remain very bullish on oil (NYSEARCA:USO) prices as we think fundamentals are all pointing in the right direction, but demand needs to remain strong in order for the surplus to go away.
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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.