The First Half 2016: Supply, Demand, and the Spiking Dollar on Brexit Fears

The rise in oil prices during the first half of 2016 was driven by two of the most basic economic forces: supply and demand.

First, in May, the price of both WTI and Brent hit a six-month peak when the International Energy Agency (IEA) forecasted a drop in production of 200,000 barrels daily during the last six months of this year.

Second, not only was expected supply dropping but expected demand was rising. Several months ago, the IEA reported demand projections rising in 2016. The IEA estimates that worldwide demand will increase by 100,000 barrels daily this year as well. The driver? Largely China and India, two robust emerging markets.

Falling supply and rising demand have been bullish for oil prices in 2016.

The first half also had the U.K.’s vote to leave the European Union in late June. Moors terms the Brexit decision “the biggest single event to jolt markets in decades.” Why? In the short term, it sent markets – oil, stock, and currency – down steeply on uncertainty fears.

In the case of oil specifically, though, the flight to a safe haven in the U.S. led to an increase in the U.S. dollar. Because oil is denominated in dollars, it becomes more expensive to overseas buyers when the dollar advances. That can restrict their demand going forward.

While Moors believes that the two-year negotiations between the U.K. and the EU will continue to exert a downward drag on oil prices, any weakness will be offset by bullish factors later in the year and into 2017.