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Brexit and commodity prices

24 June 2016 14:41 (UTC+04:00)
Brexit and commodity prices

By Fatma Babayeva

British people backed Brexit in the June 23 referendum , and global oil prices tumbled down by more than 6 percent as a result.

Sharp decline in oil prices has been predicted earlier after Brexit due to possible economic slowdown in the old continent.

Until now, the oil prices were supported by the outages from Canada, Nigeria and Libya which trimmed global oil glut. However, global oil market is facing a different type of challenge now. With Britain leaving the EU, the oil demand of the union is expected to go down.

August futures’ price of international Brent benchmark traded down by 4.73 percent to $48.5 a barrel in London ICE on June 24 by 2:28 am, while the price of WTI crude with August delivery in NYMEX fell by 4.43 percent to $47.89 a barrel on the same day by 2:47 am.

Nevertheless, price of Azeri Light crude experienced an increase by $0.39 to $51.05 a barrel in the global market. On June 22, OPEC’s oil basket price stood at $46.46 a barrel.

In the meantime, sterling lost 8.05 percent value against the U.S. dollar by hitting lowest level since 1985 while gold prices pulled back from two-year highs. August futures of gold surged by 5.10 percent to $1,327.5 an ounce in NYMEX.

There are lots of uncertainties currently in the global oil market causing volatility. Whether, the previously forecast by the International Energy Agency (IEA) on the rebalancing the market will happen is yet a question at issue. However, some still expect supply and demand side to come into balance soon and support oil prices around $50 a barrel in the near future.

Citigroup expects oil prices to reach $60 a barrel by the end of 2017. Seth Kleiman, head of European Energy Research at Citigroup believes that there is no need to expect growth in crude supplies in the global market as there is no signals that Nigeria, Venezuela, Algeria or Libya turning into Switzerland soon. Thus, it is groundless to expect a significant increase in supply from these countries.

In addition, the production in Latin America declined by 500,000 barrels a day, he added. Kleiman also believes that focusing on the return of U.S shale companies into big game is quite reckless, as oil price at $50 a barrel is only an indicator or psychological threshold.

In reality, the U.S. shale companies will be able to increase production at a price only above $60 per barrel, however, with great caution, stressed the expert.

Impacts of Brexit on Azerbaijan

The panic in the global financial markets over Brexit also has impact on the exchange rate of Azerbaijan’s national currency, the manat, particularly against euro and the pound sterling.

The Central Bank of Azerbaijan reported that euro fell by 3.2 percent to 1.6787 against the manat on June 23, while depreciation in the pound sterling against the manat stood at 9.3 percent by amounting 2.0530 manat/pound sterling, which is the lowest rate of the pound sterling against the manat since the devaluation took place in December 21, 2015.

In the meantime, the CBA predicts an increase in the rate of the U.S. dollar against the manat. Great Britain’s exit from the EU is expected to strengthen the rate of the U.S. dollar, as well as, its role as a key currency.

The CBA will have to resort to intervention again at the result of Brexit referendum in order to avoid the sharp fluctuations in currency pairs.

As price of oil which is traded in U.S. dollars fell after the Brexit, the revenues to the state budget will also be affected. Nevertheless, the state budget of Azerbaijan for 2016 was estimated based on the oil price at $25 a barrel.

Meanwhile, the prices of imported goods from Britain to Azerbaijan are also expected to decrease. The weak pound sterling will also stimulate the inflow of the investment from the UK to the country.

Moreover, travelling to the Kingdom will be more affordable for the citizens of Azerbaijan.


Fatma Babayeva is AzerNews’ staff journalist, follow her on Twitter: @Fatma_Babayeva

Follow us on Twitter @AzerNewsAz

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