Trading was volatile on Friday, with oil falling by around 6% earlier in the session. Brent was down by around 5.5% by the European mid-session at $48.12 a barrel. Its U.S. counterpart, West Texas Intermediate, was down 5.1% at $47.54 a barrel.
Oil prices are reacting to market volatility based on headlines but oil analysts and traders say Friday’s price decline was likely to be short-term.
“The core oil fundamentals are still unchanged, so I think we will have to wait a while for the dust to settle,” said Olivier Jakob of Switzerland-based Petromatrix.
Despite the losses, oil prices were still holding within a 20-day average at well above $45 a barrel. A stronger supply and demand outlook has helped elevate prices over the past few weeks, with global outages helping to curb the oversupply which has weighed on Brent and WTI.
Analysts say that market fundamentals still point to a long-term recovery later in the year.
“If you look at the [International Energy Agency] forecast for demand, and we have a flat supply outlook, this still suggests we will have a supply shortfall, and this won’t change because of Brexit,” said James Butterfill of ETF Securities.
Others say the worst may be yet to come. Investors holding speculative positions are likely to sell rather than expand amid the uncertainty, said German-based Commerzbank, which could limit gains to prices.
Despite this, the bank was positive on market fundamentals. “There is hardly any fundamental justification for lower prices in the long term given that the oil market has tightened considerably,” it said.
Commodity analyst Bjarne Schieldrop of SEB Markets agreed that a larger selloff could be expected later on Friday: “Do note, however, that last week [oil] sold down to $46.94 [a barrel] just on the pure fear of a possible Brexit. It would be strange if it does not beat that low today.”
Oil investors are positioning themselves to trade off volatility in prices, driven by chaos in financial markets.
The pound has been battered over the uncertainty of the U.K.’s future, dropping to a 40-year low, as the U.S. dollar rose sharply. A stronger dollar tends to suppress oil prices. Since oil is priced in dollars, a stronger dollar makes oil more expensive for holders of foreign currencies.
Aside from the U.K. referendum result, weekly data from U.S.-based Baker Hughes will be released later Friday, showing U.S. rig counts. If there is a rise, prices could tumble further, as a sign that U.S. production is beginning to recover.
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