The Votes Are In -- Great Britain Will Not Remain Part Of The European Union (EU)

By a margin of 51.9% to 48.1% on a 72.2% turnout, the U.K. electorate voted to leave the EU in a historic referendum.

Why the ‘NO’ Vote

Supporters of ‘Vote Leave’ mainly point toward Europe’s migration crisis and continued Eurozone travails. Their stance is based on the premise that the EU has out-served its purpose and has held back Britain. Exit from the bloc can help Britain to have free trade deals with countries, take back full control of its borders and choose who comes to their country.

The skeptics were able to outnumber the ‘Remain’ camp who believed that Britain gets a boost from EU membership, as it makes selling things to EU countries easier. Moreover, the flow of immigrants fuels economic growth.

Triggers Market Uncertainty

Following Brexit – the short way of saying Britain’s exit from the EU – the FTSE 250 index plunged more than 10%. The seismic shock from the ‘Leave’ campaign victory has been so severe that Prime Minister David Cameron announced his decision to resign from his post by October.

However, the impact to secede from the EU is unlikely to remain insulated to Britain.

As expected, the undeniable and immediate fallout was the plunge in the value of the British pound, which crashed to 1985 lows. This would lead to a flight toward safe haven currencies like the dollar. A stronger dollar would create multiple challenges for a Federal Reserve which has just wound up a program of monetary easing and is looking for opportunities to raise rates.

In such a scenario, it is next to impossible that U.S. markets would be spared. In fact, by the looks of the futures, the US markets are expected to experience a ‘Black Friday’ and effects of the stunning development are likely to be felt not only throughout today’s trading session but also in the days to come.

With Britain accounting for 10% of the top-line for 30 S&P 500 players, a hammering for U.S. stocks cannot be ruled out in the wake of Brexit turning into a reality. US firms, with exposure to Britain, are likely to hit badly with the tumbling pound reducing U.S. earnings on repatriating the income.

And Oil Selloff

Adding to the general atmosphere of chaos in the markets, the British referendum to break with Europe also buckled oil prices, which retreated more than 6% to under $48 a barrel.

The biggest single-day plunge in over 2 months could be traced to the following concerns:

The most pressing concern for the industry right now is the exacerbation of the already challenging environment created by the low oil prices. As it is, crude prices fell to a 12-year low in Feb, threatening the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer’s profit margins.

However, indications that supply was easing helped oil prices rebound some 90% since then. At this juncture, Brexit will only add to the wave of uncertainties and increase the commodity’s volatility.

The ensuing market turmoil – amid talks of a second Scottish Independence referendum – might impact investment plans for new project sanctions that is already at a historic low because of the oil price crash.

There is a belief among the U.S. officials that exit of the world’s fifth-largest economy from the EU will hit U.S.’ biggest trading partner’s growth, which in turn will weaken the domestic economy and reduce oil demand.

European oil companies like TOTAL S.A. and Statoil ASA employ a number of U.K. workers in EU countries and vice versa. Following Brexit, these workers might have to be granted ‘non-EU’ citizen status that could escalate employer costs – something the industry would like to avoid in this low price environment.

The dollar’s strengthening will likely make the greenback-priced crude more expensive for investors holding foreign currency and suppress prices.

Energy Investors: Prepare for a Bumpy Ride, but Don't Panic

While Brexit will be a blow to U.S. oil explorers and producers like Apache Corp. (APA Quick QuoteAPA - Free Report) – that get around a fifth of their sales from the U.K. – such cases are few and far between. In any case, the U.K. constitutes a miniscule 1.6% of global crude demand, so the commodity is unlikely to be too affected by a Brexit vote. Moreover, with core oil fundamentals still unchanged, the commodity is well set for a long-term recovery though one might have to wait for the dust to settle.

In fact, once the hoopla over Brexit dies down, the two Britain-based oil majors – Royal Dutch Shell plc and BP plc (BP Quick QuoteBP - Free Report) – could even become attractive investment options. With oil futures plunging, these quality names are likely to get sold off sharply amid the global financial panic. Considering that both Shell and BP are well positioned to leverage the world’s growing energy need, one could buy them later in the summer at even lower prices when they move upward from their current Zacks Rank #3 (Hold). The weak pound will make dollar-based investing even more attractive.

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