Oil Declines in Post-'Brexit' Hangover
Oil prices fell to one-month lows Monday, with a stronger dollar and haven-seeking investors still pushing crude into a retreat after Friday's unexpected choice from U.K. voters to leave the European Union.
U.S. oil for August delivery recently traded down 3.6% at $45.93 a barrel on the New York Mercantile Exchange. That would be its second-largest daily decline since the beginning of April. Brent crude recently traded down 3.3% to $46.81 a barrel on ICE Futures Europe.
This is now the second day of losses, adding to oil's plunge of as much as 7% Friday after Britain's decision to exit the EU, known as "Brexit," surprised investors. The vote has shaken investors' confidence in the stability of the global economy and financial system, pushing them out of many stocks, currencies and commodities and into assets considered havens such as gold and the U.S. dollar, analysts and traders say.
The pound fell further on Monday and sent the U.S. dollar soaring. The Wall Street Journal Dollar Index, which tracks the greenback against a basket of other currencies, recently gained 1.2%. A stronger greenback makes oil more expensive for traders using other currencies, typically pushing prices down.
The fall is likely exacerbated by how hard investors had been betting on rising prices, traders and a broker said. Oil has had its sharpest rally since the financial crisis, nearly doubling in price since late February as traders bet supply outages around the world and lower U.S. output were easing a massive glut. As they close out or recalibrate the risks in the market, the selloff can snowball.
"Crude has already come a long way and needed a breather," said Tim Pickering, president at Auspice, which manages $300 million. "Brexit is simply an excuse."
Mr. Pickering and several bank analysts said Monday that the factors pushing oil higher in the long term are likely still there. Even if spillover effects from the vote slowed major economies around the world, it would likely reduce oil demand by just 130,000 barrels, or 0.1% of global demand, the bank said. Deutsche Bank had estimated just 100,000 fewer barrels of oil demand a day, compared with outages in Nigeria that are taking 400,000 barrels a day off the market.
"The impact on industrial commodity fundamentals of a leave vote is extremely small from the demand side," Goldman said. "On the supply side, a stronger dollar would lower the cost of production which has likely been priced into markets with [Friday's] selloff."
But Goldman and Morgan Stanley did point out a big risk from China. As investors flee to the dollar, the yen and other safe-haven assets, China will be trying to ward off another sudden currency devaluation, Goldman said. Gasoline and diesel demand also slowed further in May, Morgan Stanley said.
The U.K. vote reduces the chance of a surprise jolting prices higher when the outlook was already fragile because of the risk of oversupply, the Morgan Stanley analysts said. It has pushed many to delay their expectations for a bigger oil-price recovery much deeper into 2017, said Todd Garner, managing partner at hedge fund Protec Energy Partners LLC, which manages $100 million of assets out of Boca Raton, Fla. He added that he isn't bullish until then.
"China's demand is definitely waning," he added. "It is what's slowing everything down."
Gasoline futures recently fell 3.4% to $1.4735 a gallon. Diesel futures fell 2.7% to $1.4163 a gallon.
--Miriam Malek and Jenny W. Hsu contributed to this article.
Write to Timothy Puko at tim.puko@wsj.com