Portfolio | Oil market looks neutral to bearish in near term as focus returns to fundamentals

The UK’s Brexit vote dominated oil market sentiment for most of June, not because of its direct impact on oil demand and supply but through its impact on the US dollar index and financial markets.

The UK economy plays a very small role in the global oil market, with the UK accounting for about 1 per cent of global oil supply and 1.6 per cent of demand.

A stronger dollar, however, makes oil imports more expensive for holders of other currencies and is generally seen as bearish for demand. The US Dollar Index hit a three-month high of 96.7 in the aftermath of the UK’s decision to leave the EU.

A rally in crude futures that began in February stalled this month under the weight of a rising dollar, pushing prompt contracts for NYMEX crude and ICE Brent back below US$50/b.

Brexit also raised the degree of volatility in the futures market. Realised volatility for front-month crude ticked higher in the run up to the Brexit vote, arresting a steady slide that began in February, when volatility hit highs not seen since early 2009.

Front-month NYMEX crude volatility hovered around 30 per cent, up from less than 20 per cent earlier this month, according to data supplier GlobalView. That figure was above 90 per cent in February.