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Brexit Pulls Oil Price Down

Brexit Oil

Image source: FotograFFF / Shutterstock.com

What's going on?

Another casualty of the Brexit vote has been the price of oil – it’s fallen about 7% since Thursday (in US dollar terms) which is the biggest two-day drop since February.

What does this mean?

The oil price has fallen for a few reasons. For one, the economy in the UK and Europe is likely to be hurt and less economic activity means less demand for oil (e.g. fewer people going on holiday means airlines buy less jet fuel). Importantly, the rising value of the US dollar has also had a big impact because, as the US dollar goes up in value, the price of oil goes down (click here for a full explanation).

Why should I care?

For you personally: Whether oil has become more expensive depends on where you live. For Americans, the stronger dollar should make gas/petrol cheaper. But for Brits, who have seen the pound decline sharply, it will get much more expensive. And that’s true for all imported goods (e.g. vegetables or iPhones). So inflation in the UK (and Europe, though to a lesser extent) will likely go up as stuff is getting more expensive (the opposite is true for the US).

The bigger picture: A lower oil price is bad for some stocks. For one, energy producers make less money when the oil price goes down. Also, many oil companies have taken on a lot of debt, so there is a greater risk of bankruptcy than with many other industries (because they need to pay back that debt). However, since the oil price has gone up a lot recently, a pullback isn’t as much of a threat to markets as it would have been just a few months ago.

Originally posted as part of the Finimize daily email.

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