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Crude Oil Fell almost 8% in the Last 2 Days: Is It the Turning Point?

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Jun. 28 2016, Published 4:05 p.m. ET

Crude oil prices 

August West Texas Intermediate crude oil futures contracts fell by ~2.8% and settled at $46.33 per barrel on Monday, June 27, 2016. Brent crude oil futures fell by ~2.6% and closed at $47.16 per barrel, which is its lowest settlement since May 10, 2016.

[marketrealist-chart id=1406028]

Prices fell for the second day due to the aftermath of the Brexit vote on Friday, June 24. Crude oil futures tracking the United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) fell by ~1.8% and ~3.5%, respectively, on June 27, 2016.

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Brexit, currency, and crude oil

On June 23, 2016, the Brexit referendum passed, as Britain voted on the question of leaving the European Union. The Leave campaign prevailed, with 51.9% voting to leave the EU, compared to 49.1% garnered by the Remain campaign.

Brexit could lead to a weaker euro and a stronger US dollar, which is a safe-haven currency. It also led to massive sell-off in the global markets. The pound was down by ~11%, its lowest level compared to the dollar since 1985. The dollar index appreciated by more than 3% in the last two days.

The appreciating dollar makes crude oil expensive for oil-importing economies. As a result, crude oil was down by almost 8% in the last two days. The PowerShares DB US Dollar Index Bullish ETF (UUP) tracks the performance of the US dollar. The above chart shows the relationship between the US dollar and crude oil.

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Looking ahead

Pro-Brexit supporters suggest this will benefit Britain over the long term. Meanwhile, traders expect that Brexit will impact global stock exchanges, the currency market, and the bond market in the short term.

Volatility in crude oil prices impacts oil producers like Cobalt International Energy (CIE), Halcon Resources (HK), and Northern Oil & Gas (NOG). This volatility also impacts funds such as the iShares US Oil Equipment & Services ETF (IEZ), and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO). 

Series focus 

This series focuses on the API’s crude oil inventory report, Cushing crude oil inventories, US crude oil rig count, the US Commodity Futures Trading Commission’s Commitments of Traders report, and the crude oil price forecast.

Continue to the next part of this series for more details on catalysts for the crude oil market this week.

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