Oil-Price Volatility Seen by Banks If Scotland Votes for a Split
Sept. 18 (Bloomberg) — A Scottish vote for independence would probably cause swings in the price of Brent oil as the ensuing political uncertainty threatens economic growth in the European Union, Commerzbank AG and Natixis SA said.
Voters in Scotland are deciding whether to seek independence from the U.K. in a ballot today. A “yes” vote would increase uncertainty in financial markets that would drag crude prices lower, Commerzbank said. The North Sea Brent benchmark, used to price more than half the world’s oil, could become more volatile as companies reconsider investments needed to underpin production, according to Natixis, France’s second- largest bank.
Brent crude futures have lost 11 percent this year, trading near $99 a barrel in London today, amid surging U.S. production, slowing growth in China and a stalled recovery in Europe. The possible breakup of the EU’s third-biggest economy has been low on the region’s agenda and German Chancellor Angela Merkel’s government hasn’t made contingency plans for a U.K. split. In Spain, which is grappling with its own separatist movement in Catalonia, a “yes” vote would set a “terrible precedent,” Foreign Minister Jose Manuel Garcia-Margallo said.
“If the yes wins, it will have further consequences and uncertainty about the future of the European Union,” Olivier Jakob, managing director at consultants Petromatrix GmbH, said by e-mail from Zug, Switzerland. European institutions “have refused to talk about that scenario.”
Volatility Gauges
The pound strengthened to the highest level versus the euro in two years today as a poll by Ipsos Mori showed 53 percent of those surveyed said they would vote “no.” Scots began voting at 7 a.m. local time and final results may not be known until 6 a.m. or later tomorrow.
Measures of Brent crude’s price volatility have declined in the past week. The grade’s so-called implied volatility, a gauge of anticipated swings, dropped to 16.2 percent yesterday after reaching a one-year high of 24.7 percent on Sept. 9. Brent’s 10- day historical volatility, which tracks its past performance, eased to 17.6 percent today from 21.5 percent a week ago.
“A yes vote for Scottish independence would generally increase uncertainty on the markets in the short term, which would certainly be sufficient to put pressure on oil prices,” Carsten Fritsch, an analyst at Commerzbank in Frankfurt, said in a report. “Nervousness is likely to remain.”
Dwindling Output
The resulting uncertainty for Europe’s economic revival would probably strengthen the dollar in relation to the euro, pushing oil prices lower, Bjarne Schieldrop, chief commodities analyst at SEB AB, said by phone from Oslo.
A 15-year decline in U.K. oil production may intensify if Scotland opts for separation because companies could reconsider spending plans if the tax and regulation framework changes, according to Natixis. The U.K. pumped an average of 866,000 barrels a day last year, the bank said.
“Oil prices are based on a limited supply of North Sea blend that would probably fall under Scottish independence,” Abhishek Deshpande, an analyst at Natixis in London, said in a report. “Reduced investments in North Sea could make Brent prices more volatile unless other grades are incorporated in future in the Brent pricing basket.”
The European crude-price benchmark is based on the trading of four North Sea grades, Brent, Forties, Oseberg and Ekofisk.
Trade Agreement
Flows of North Sea crude to South Korea, boosted to a record high because of a free trade agreement between the Asian importer and the EU, could also be at risk, according to Petromatrix’s Jakob. The arrangement, approved in 2011, waives a 3 percent tariff on crude imports by South Korean refiners.
“The EU has shown a lot of resistance on what the implications of independence would be” and nobody really knows where Scotland would sit within the European structure, Jakob said. “If you’re not part of the EU, then you’re not legally bound by those treaties.”
Wojtek Talko, a spokesman for the EU’s Trade Commission, declined to comment on whether the agreement will still be valid. William Sim, spokesman for South Korea’s Ministry of Trade, Industry and Energy, declined to comment.
–With assistance from Laura Hurst in London.
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net James Herron, Claudia Carpenter
