Email

Brexit Just “Killed” London as the Energy Capital of the World

by | published June 24th, 2016

There was no sleep overnight in my global network, as it became increasingly clear the UK had voted to leave the EU. Major moves are underway in the global energy sector as players attempt to wrestle with what may be the biggest single event to jolt markets in decades.

Once the dust settles, the UK will take its place as a now second-tier economy.

And after having spent all night talking with my contacts in Europe and Asia, here are the immediate takeaways from the Brexit vote for you and your investments…

This is Political Suicide

Some eighty years ago a mainstay of the Greenwich Village literary scene coined a phrase that has been with us ever since. Gertrude Stein traveled from New York to Oakland. Upon her return from the West Coast, somebody asked for her reaction.

“There’s no there there,” was Stein’s response.

Much the same can be said this morning about the European Union.

What unfolded overnight is like walking off a cliff and hoping for the best. It likewise demonstrates why one should never play politics with contentious issues unless you control the outcome, a lesson the British Prime Minister has learned too late.

This was a fundamentally colossal act of political suicide. The referendum, initially regarded as a hollow (and safe) initiative during an election campaign, has now brought down a government.

The historic move by British voters is reverberating across global markets like a shock wave. While it will take some time to determine what the true impact will be, several results are already coming into focus.

Brexit is Already Roiling Markets

On the broad front, the impact has been staggering.

First, David Cameron has already announced he will be stepping down as British Prime Minister and new elections will be called (probably for early fall).

Second, Brussels (the seat of the EU) will now go into damage control and the animosity between the continent and London will ramp up significantly.

Third, this may be the first of several “shoes to fall.” The Spanish parliamentary election this weekend will provide us the initial read on similar views elsewhere in the EU. My contacts now expect Ireland, Portugal, and even the Netherlands to experience similar exit pressures.

Fourth, this morning Spain has also already fired the first salvo. It is now demanding control over Gibraltar – the UK’s exclave at the southern tip of Spain – in the wake of the British departure from the EU.

Fifth, the Bank of England has promised “unlimited” liquidity support for the British pound sterling after it collapsed worse than at any time over the three decades. Nonetheless, the currency will be under pressure for some time and that will have a toll to exact from the British economy.

Sixth, hundreds of thousands of trade, investment, business, banking, and fiduciary arrangements ae now in limbo…as are hundreds of thousands of jobs.

Seventh, the Euro will come under intense pressure as the contagion spreads throughout Europe.

But it gets worse…

London’s Significance will Fade

Oh yes, Daesh (the name for ISIS that the group itself hates) issued a statement applauding the “death of Europe.” This time around, on the other hand, it could not find a way to claim responsibility.

Other ducks will be falling shortly. Markets throughout the world are awash in tidal waves of red ink. The dollar and U.S. fixed instruments (bonds) are once again becoming a “safe haven” for international investors.

Against this backdrop, rapid aftershocks are occurring in energy. Following hours of discussions with contacts in Europe and Asia, these are the immediate consequences:

Both WTI (West Texas Intermediate) and Brent, the two leading international benchmarks for oil trading, posted 5% losses in overnight markets. The losses have since leveled off.

You see, the sudden drop in both pounds and the Euro is strengthening the dollar, which makes oil more expensive abroad, pushing demand and prices down. This is likely to rebalance, but there will be some choppy forex waves to overcome.

On the plus side, global demand is increasing and supply balance is taking shape. But the volatility spawned by the UK exit vote will provide some hefty headwinds for oil in the short-term.

The vote has also done major, perhaps fatal, damage to “The City” (London’s financial district) and its position as the world’s preferred location to raise energy project capital. For years more money has been raised for energy projects within a radius of two miles from Liverpool Station and St. Paul’s than anywhere on earth.

This will now end. Banking and fiduciary action will move to New York (almost initially by default) and Dubai (the more moderate-term beneficiary). Frankfurt and even the Russian fledgling exchange in St. Petersburg will also increase in activity.

Meanwhile, a range of cross-border holdings based in London and involving oil, natural gas, and renewable controlling structures are now in jeopardy.

And the pound sterling collapse will linger, having an adverse impact on Brent remaining as the dominant international benchmark. Since the vast majority of contracts are denominated in dollars, the exchange problems will be gravitating toward spreads favoring WTI.

Now, the effects won’t be limited to just Europe…

Saudi Arabia will Abandon Brent

In fact, my Saudi Arabian contacts confirmed shortly after midnight U.S. Eastern time that they expect the Saudi national oil giant, Saudi Aramco, to move to increase the usage of and support for the Argus Sour Crude rate. However, that rate will progressively be based on actual consignment trades, not the Brent index determined daily in London. The discount to Brent (as currently calculated) will be phased down.

In addition, the Saudi move to turn a 5% sale of oil giant Aramco into a massive $2 trillion international investment fund will be expedited, while U.S.-based energy investments and assets will come into increasing focus.

To the last point, billions of dollars in available investment capital has been assembled – virtually overnight – to begin energetic acquisition campaigns in the U.S. oil patch.

Oil will stabilize well in advance of the global market as a whole. Gold may be the initial beneficiary of Brexit. But, as I have discussed in the past, crude oil will progressively become the non-currency “store of value” moving forward.

The good news is that, as the situation stabilizes over the next several weeks, the American market will be seen as a “safe haven” and is going to be the center of an investment feeding frenzy.

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Victor Pedroza
    June 24th, 2016 at 19:25 | #1

    It just shows you that you kick the dog too many times and it will bite back.

  2. Richard
    June 24th, 2016 at 19:44 | #2

    The rats are leaving the ship, where will they go? Nowhere of course. The dinosaurs are dying off and they are afraid. The greatest fear our leaders have is being held accountable for their incompetence.

  3. Hubert Frings
    June 24th, 2016 at 19:49 | #3

    Dr Moors, I really don’t understand you. First, you make a couple of factual mistakes: David Cameron will indeed resign as PM, but nobody has said new elections would be called. Some have speculated that the new PM, whether it’s Boris Johnson or somebody else, might call for new elections, but there is no legal requirement or automatic mechanism for new elections. Also, the train station is called Liverpool Street, not Liverpool.
    Second, it was widely expected that, in case of a “Leave” vote, the pound and the global markets would take a short-term hit. It is too early to gauge how permanent the “shock wave” effect will be, or what long-term effects Brexit will have on the British economy. One could easily make the argument that, now that the Brits are masters of their own destiny, they will be able to manage their economy more effectively than if the European commission still told them what they could and could not do. My expectation, in fact, is that the EU will be hurt worse than the UK by Brexit.
    Finally, you make all kinds of predictions without establishing any cause-and-effect relationship between Brexit and your predictions. Frankly I have to scratch my head at most of them. Maybe you and your contacts in Europe and Asia are too close to the forest to see the trees. I happen to believe London will continue to prosper as a financial powerhouse, just as it was before it joined to EU. As to whether it remains the “energy capital of the world” (to the extent it ever was), I believe the energy market is no longer dependent on Brent, WTI or any other oil-related benchmark and London will remain a leading market where energy derivatives will be traded in the future. Because the question is not whether your home-produced oil commodity is relevant; the question is whether you have the wherewithal to trade financial instruments. And that’s where London excels and will continue to excel.

  4. Frank Snell
    June 24th, 2016 at 20:19 | #4

    Ok

  5. Geoffrey Ballard
    June 24th, 2016 at 22:18 | #5

    Brexit Observations – excluding the Sensationalism

    A Prime Minister resigned.
    The £ plummeted.
    The FTSE 100 lost significant ground.
    But then the £ rallied past February levels, and the FTSE closed on a weekly high: 2.4% up on the previous Friday, its best performance in 4 months.
    President Obama decided the UK wouldn’t be at the ‘back of the queue’ after all, and that the US/ UK ‘special relationship’ was still strong.
    The French President confirmed the Le Touquet agreement would stay in place.
    The President of the European Commission stated Brexit negations would be ‘orderly’, and stressed the UK would continue to be a ‘close partner’ of the EU.
    A big bank denied reports it would shift 2,000 staff overseas.
    The CBI, vehemently anti-Brexit during the referendum campaign, stated British business was resilient and would adapt.
    Several countries outside the EU stated they wished to begin bi-lateral trade talks with the UK immediately.

  6. John Hurst
    June 24th, 2016 at 23:06 | #6

    The U.K. Government has not fallen. David Cameron’s decision to resign will require the election of a new leader of the Conservative Party, who will become Prime Minister. There is no need for a general election.

  7. JD Kegler
    June 24th, 2016 at 23:16 | #7

    Okay, you had your say in this. But the road England was going down is the real road to suicide. The EU is a disaster and to prove it all that needed to happen was for the Brits to say; ‘So long!’ and the whole house of card is going to come crashing down. Merkel should be indicted and jailed. Greece should have to abide by their own decision to let all the other nations provide for their retirement sweetheart laws. And so on and so one. Such a joke to now say; ‘the Sky is falling, the sky is falling.’ It had crashed a long time ago. Let the ashes be swept up when it’s over and actually learn form this colossal mistake titled the European Union!

  8. Robert Berke
    June 24th, 2016 at 23:37 | #8

    “This was a fundamentally colossal act of political suicide.”

    Exactly. One of the most critical political mistakes we’ve ever seen.

  9. Steven K.
    June 24th, 2016 at 23:42 | #9

    Many global O & G projects are tendered in US dollars. So, the relative Euro and GBP exchanges will automatically increase the local currency costs at a time when spending and the industry is already tightening its belt. I think it will impact an anticipated 2017 O & G sector recovery.

  10. Christopher Clark
    June 25th, 2016 at 04:11 | #10

    Dear Kent,
    I have been a faithful follower of you writings for many years, but your above article on Brexit is I, and many of my countrymen, would believe to be pessimistically unbalanced. London has been one of the major, if not the major, financial centres of the world for hundreds of years – do you seriously think it is going to die because Britain has taken back our fundamental freedom to govern ourselves ? No, we will be stronger. The markets are moved by sentiment as I do not need to tell you, so you are bound to get a reaction, a scare if you like, by people who forget who we are, but they will see that we have done the write thing – if not why is the rest of Europe so worried ? In seeing common sense I am glad to say that we have let the genie out of the bag and democracy will return here while Europe wrestles with the consequences of the flawed German benefit Euro, because it cannot survive in it’s present form.
    So watch this space as London and the UK come storming back to reality as a major world economy and not as a ‘second tier’ economy as you suggest – the EU is not as significant as you think with respect in regard to the British and their economy. Cameron may look as if he has committed political suicide, and maybe he did, but he was bowing to British political opinion and gave us probably our last chance to recover our democracy and sovereignty, it was just that he got it wrong when he chose the side to be on with regard to In or Out.

  11. Alex
    June 25th, 2016 at 05:14 | #11

    The people who voted for leave feel a massive disconnect with the financial markets in other areas of the UK. There is widespread feeling that this wealth generation doesn’t cascade down to the working man up north.the remain campaigning was awful and very complacent

  12. Paul Ellenbogen
    June 25th, 2016 at 05:49 | #12

    Thanks a lot for this prescient analysis quick and incisive. We really r living in interesting times. The United States should benefit.

  13. r,c. pulliam
    June 27th, 2016 at 10:25 | #13

    a tisket a tasket, why doesn’t anyone want those euros in that basket?

  14. Dan Glass
    July 5th, 2016 at 21:41 | #14

    None of this makes any sense and won’t until all the facts are in. Until then it’s all speculation, the same as it’s always been. Frenzy is fueled by uncertainty.

  15. July 6th, 2016 at 04:55 | #15

    If everybody look with attention, must feel stress, after Brexit,banking system stress, real estate market stress, farmer stress,menthal health increasing stress!May by, David Cameron come back and calming this situation!

  1. No trackbacks yet.