Oil caps biggest two-day loss since February on Brexit fallout

NEW YORK (Bloomberg) -- Oil capped the biggest two-day drop since February as futures remained volatile after the UK last week voted to leave the European Union.

Futures tumbled 2.8% in New York, extending Friday’s 4.9% slump, the biggest drop in four months. The turmoil in financial markets continued as the pound extended its record selloff while demand for haven assets boosted gold and the dollar. Crude may plunge if the shock of Britain’s vote comes as output rises, Russian Energy Minister Alexander Novak said.

"A chill has come over the market due to the Brexit vote because it brings with it the prospect of slower economic growth and lower oil demand," said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. "The dollar is higher, which is putting pressure on commodities as a whole."

Oil capped a second weekly drop on Friday as prices slid with equities after the UK voted to quit the EU following more than four decades of membership. Nigeria continues talks to restore oil output lost to rebel attacks while Canadarestarts facilities after wildfires. Saudi Arabia, the International Energy Agency and BP Plc all see a balance emerging between supply and demand. Prices are up almost 80% from a decade low in February.

West Texas Intermediate for August delivery fell $1.31 to settle at $46.33/bbl on the New York Mercantile Exchange. It’s the lowest close since June 16 and caps a 7.5% two-day decline. Total volume traded was 20% below the 100-day average at 2:51 p.m.

‘Serious’ drop

Brent for August settlement dropped $1.25, or 2.6%, to $47.16/bbl on the London-based ICE Futures Europe exchange. The contract closed at the lowest since May 10. The global benchmark crude ended the session at a 83-cent premium to WTI.

For a Gadfly commentary about Iran’s oil export boom waning, click here.

The Bloomberg Dollar Index, which tracks the currency against major peers, rose as much as 1%. A stronger greenback curbs investor demand for dollar-denominated commodities. The Bloomberg Commodity Index, a gauge of 22 raw materials, decreased as much as 0.6%.

"If the dollar continues to strengthen you could be talking about $40 oil," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.3 billion. "The dollar is key, even though it doesn’t have a lot to do with supply and demand, at least in the short term. This will make oil more expensive for non-dollar buyers, which will hurt demand long term."

Moving average

WTI closed below the 50-day moving average, which stands at $46.92, for the first time since February. A settlement below this indicator may signal further price declines to come.

Returning production in Canada and Nigeria, combined with the Brexit result, could mean “the drop in prices in the short term may be serious,” Russia’s Novak said in an e-mailed statement.

A cease-fire with the Niger Delta Avengers is ongoing, allowing repairs to some pipelines, Nigeria’s State Minister for Petroleum Resources Emmanuel Ibe Kachikwu said in Beijing. Output may return to about 2.2 MMbpd in July amid ongoing talks with rebels, Kachikwu said on Bloomberg television. Production was at 1.8 MMbbl to 1.9 MMbbl as of two days ago, he said, while predicting prices may end 2016 at $50 to $55/bbl.

"The combination of a stronger dollar and an increase in Nigerian output gives the market a bearish directional bias," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. "The other shoe may drop when we get reports from the IEA, DOE and OPEC next month that are likely to have cuts in their demand estimates as a result of the British vote."