Fallout from Brexit could hit Houston
The economic aftermath of Brexit could jeopardize this year’s swift growth in global energy demand, setting back a fledgling recovery in crude prices — and a long-anticipated improvement in Houston’s economic fortunes.
U.S. oil prices, which rallied in recent months on signs the world’s oil glut was shrinking, have dropped nearly 8 percent since the United Kingdom’s vote last week to leave the European Union, threatening to extend a downturn that has cost Texas more than 100,000 oil and gas jobs over the last two years.
Analysts say the upheaval in global politics and financial markets could trigger a slowdown in hir-
ing, business expansions, trade and the demand for oil. Barclays, the British financial services firm, estimates the repercussions of Brexit could cause worldwide economic growth to contract 1 percentage point, to a total of 2.7 percent, in the second half of the year, cutting as much as 200,000 barrels in daily oil demand growth.
“The worst has yet to come,” said Michael Cohen, an oil analyst at Barclays. “If people aren’t being hired, they won’t be driving to work. Are you going to expand your factory in this environment? No. It’s a broad repositioning of the global economic path forward.”
If investors were looking for calm when markets opened Monday, they were quickly disappointed. Investors fled to safe havens such as gold and U.S. Treasuries and dumped stocks.
The Dow Jones industrial average lost another 260 points, following Friday’s 600-point rout — a 5 percent decline in just two trading days. Energy stocks were hit even harder, plunging 10 percent since British polls closed Thursday night.
Ripple effects
Energy research firm Wood Mackenzie previously forecast that the world’s bloated oil inventories would start to shrink toward the end of the year, opening the way for further increases in crude prices. But if energy demand growth slows too much, crude production could exceed demand in the fourth quarter, sending prices tumbling just as U.S. drillers are returning to the oil patch.
“It’s something to keep a sharp eye on,” said Ann-Louise Hittle, an oil analyst at Wood Mackenzie. “The Brexit fears themselves can
have an effect on economic growth. There are all these ripple effects we don’t know about.”
It wouldn’t be the first time threats to the global economy upended a big rally in oil.
Last summer, after U.S. crude prices had risen from $43 to around $60 a barrel on expectations of lower supplies and higher demand, China’s manufacturing sector began showing signs of weakness and markets became consumed with worries that Greece would default on its sovereign debt and send Europe into another recession.
In many ways, the recent developments mirror what happened a year ago. Oil traders believed supplies would shrink and demand would grow, but were disappointed by global events outside of oil producers’ control.
Brexit alone may not be enough to send crude prices back to the 13-year low of $26 a barrel reached in February, but it could push prices down to around $40 a barrel, analysts said.
Jolt for workers
That’s bad news for the legions of Texas workers waiting to rejoin the U.S. oil industry after drillers cut the state’s energy workforce to its smallest size since 2010, before the shale oil boom began, according to a report by Texas economist Karr Ingham released Monday.
It’s also a big jolt for market analysts who once regarded energy demand as the more stable and dependable part of the oil market. If anything, they might have worried about resurgent oil production knocking prices from recent highs around $50 a barrel.
Oil demand has grown by some 1.2 million barrels a day this year, somewhat less than last year, but with pockets of strength in the United States and India.
U.S. gasoline demand is at a record high, and Indian Prime Minister Narendra Modi’s economic reforms to open India up to foreign investments will “unleash an economic revolution in India that many people have underestimated,” Saudi Arabia’s new energy minister Khalid Al-Falih said in a recent interview with the Houston Chronicle.
“India is going to be a big, big driver of demand,” Falih said. “Southeast Asia is another market that’s going to grow – from Indonesia to Vietnam to Thailand and Malaysia. Those countries will continue to grow at a healthy rate.”
But the chilling effect Brexit has on global energy demand could potentially last, prolonging a downturn that has already lasted longer than many observers had expected.
“It’s not like a supply disruption in Nigeria: It’s likely more sustainable,” said Jamie Webster, a fellow at the Center on Global Energy Policy at Columbia University in New York. “There’s a pretty good chance (an economic slowdown will spread) because there’s so much uncertainty.”