The Brexit threat to commodities

　　Gold the temporary beneficiary.

　　Under a Brexit scenario, our global economists are forecasting European growth would fall by about 0.4pp to 1.3%. This is enough to knock about 0.1pp off global GDP growth. If we assume another 0.1pp downward revision to global growth purely because of higher economic uncertainty and some tightening in global financial conditions, this equates to a 0.2pp downward revision to global growth in 2017.

　　Arguably platinum would be the metal most directly impacted. Given the additional uncertainty, consumers may defer their vehicle purchases, dampening demand for both platinum and palladium. However, we would expect gold to be a modest beneficiary of a Brexit vote and this might soften the blow on the PGM complex.

　　Gold ETFs have started to see consistent inflows since the beginning of the year. Furthermore in the short term rising odds of a leave vote have boosted gold. We think the impact would not be enduring, but a leave vote might push gold above USD1,300/oz for a period, potentially hitting a year high of USD1,320/oz, before the market switches its attention back to the FOMC meeting on the 27th of July. In a Remain scenario, we think gold could sell off to the low USD1,200’s/oz, possibly breaching USD1,210/oz.

　　Crude oil would likely see little impact.

　　In the event of a Brexit vote, we believe that a sell-off in crude oil would likely reach USD 46/bbl. However, this would probably be a short-term effect and the significance of Brexit for oil should be minor in the longer term. A country-level model of oil demand for the top 15 oil-consuming nations based on real oil prices, income and the previous year’s oil demand indicates a minimal impact (The downside risk to oil prices from the currency impact of a Brexit vote is also likely to be minimal, as we expect at most a -2% depreciation in EURUSD. Moreover, the euro tends to outperform on risk-aversion events (FX Daily: 7 Reasons EUR/USD won’t collapse on Brexit, 21 June 2016) given that Europeans have historically repatriated foreign assets in response to crises.

　　Although both weaker global economic growth and incremental US dollar strength (beyond our already bullish USD outlook) would be negative for oil prices at first glance, the magnitude of these influences would not be strong enough to outweigh improving medium-term fundamentals over the next two years, in our view.

　　In the event of a vote to Remain in the EU, a relief rally may result in short-term upside to USD 52/bbl, but we expect this to be a transitory effect, with prices drifting back to our Q4-16 forecast of USD 50/bbl Brent. Prices at this level are already beginning to drive a gentle increase in US drilling activity. If this rebound in activity were more accelerated by oil prices moving substantially above our forecast, it would raise risks of premature growth in US tight oil production and a short-circuiting of market deficits in 2017 and 2018.