Baku, Azerbaijan, June 22
By Aygun Badalova - Trend:
The United Kingdom will vote June 23 in a referendum on whether to stay or leave the EU.
A day before Brexit vote, Brent price is trading above $50 a barrel. However, analysts see the risk of renewed downside.
BMI Research, which is a part of Fitch Group in its analysis for Brexit said that a vote to leave the EU would be bearish for prices and an immediate fall in Brent in the days following is expected.
“The scale of the decline would depend in large part on price action in the lead up to the vote; that is, on the extent to which Brexit was already priced in. In absolute terms, we see a strong probability of a drop into the low-40s or high-30s, in the case of a vote to leave the EU,” Emma Richards, an oil and gas analyst with BMI Research told Trend June 22.
BMI Research does not expect a drop below $35 a barrel would be sustainable and does not expect to see Brent retesting its 2016 lows.
“At around the $35 a barrel level - given sustained improvement in oil market fundamentals and generally positive sentiment towards the sector itself - oil would begin to look cheap and money would, in our opinion, begin to flow back into Brent,” BMI Research’s analysis said.
From a fundamental perspective, Richards said, the effects of Brexit would be relatively muted.
“The largest impact would be on the consumption side and would play out over the next one to two years, largely through damage to UK industries. That being said, UK oil demand accounts for a small share of the global total,” Richards said.
She noted that a reduction in demand from the EU would be a more significant risk, with the region representing 12.6 percent of the total, excluding the UK.
“However, our macroeconomists believe that the negative impacts on the EU real economy will be significantly lesser than the UK, although severe financial market volatility and damage to confidence would drag to the downside,” Richards said.
On the production side, according to BMI Research analyst, there would be no material impact.
“The UK government already holds authority over petroleum licensing, regulation and taxation, while the EU has had a relatively limited role to play,” Richards said.
Meanwhile the core view of BMI Research is that the UK will remain within the EU. As such, BMI Research believes that the balance of risk to Brent lies to the upside.
From a technical perspective, the company’s analysts note an inverse head and shoulders pattern may be emerging, which would indicate a bullish breakout within the coming weeks.
“A vote against Brexit could provide a trigger for the break, pushing Brent into mid-to-high 50s,” the company said.