UK votes to leave EU — the wood and the trees

Front-month Ice Brent is down some 5pc today, with product barge prices in northwest Europe trotting along behind. But look at a graph of Ice Brent prices over the last year and the move is lost in the broad falling trend of 2015 and the rising trend of 2016, emphasising that the UK vote to leave the EU is not a cataclysm, for now at any rate.

BP and Shell saw their share prices fall but, again, look at a one-year or six-month graph and it is just another blip. Both majors issued calming statements, with BP saying that staff and office locations would not be affected and pointing out that “it is far too early to understand the detailed implications” of the vote.

It is the wood not the trees that matter. For oil markets clawing their way out of a period of supply overhang with the help of strong demand growth last year and decent demand growth this year and forecast for next, the question is whether the UK electorate’s decision will trigger a slowdown in European or global GDP growth that could imperil oil demand growth and, hence, market rebalancing.

For now, on the dollar-denominated crude and products markets, it is business as usual. Traded volumes of fuel in the German market are expected to be up on the price fall. Some London brokers were more interested in the boost to their commissions from sterling’s fall. And the tanker market sails on regardless, as the Worldscale rate is based on the dollar.

Parochially, the oil and gas industry in the UK will be weighing up potential pluses and minuses for the upstream. If the pound stays weak, many costs will fall, potentially making developments more attractive. But will the industry be able to retain skilled labour? Will Scotland seek a second referendum on independence?

The complexity of these issues is nothing to those that other parts of the energy complex may face in the coming months and years. Will the UK opt out of the biofuels mandate? If so, the UK would no longer have any meaningful role in the European market and that market would be likely to suffer from yet further fragmentation.

The carbon price floor in the UK limits the impact of EU emissions trading scheme (ETS) price falls there, but in Germany — where the ETS feeds more directly into power prices — falling allowance prices are important. So, today’s initial 10pc price fall will be an immediate concern, but the structure of a future market will be an abiding worry. Will the UK stay within the ETS? Will it seek a linkage deal like Norway and Iceland? Will it tear the whole thing up and return the remnants of British industry to the days of dark, satanic mills?

Premium biomass pellet producers in the UK are rubbing their hands today at the prospect of an export boost. But, in the medium-term, market participants are wondering whether the vote will render the EU inquiry into the Drax CFD subsidy for its coal-to-biomass unit irrelevant. And what will happen to compliance with the renewable energy directive?

Today, there are many more questions than answers.

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