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Mayhem: oil and equity markets caught off guard by UK election result

Yet more uncertainty will be negative for energy demand and stunt policy

Geopolitical risk and volatility have risen since the UK voted for Brexit in 2016. Now a country once known for its political stability has pulled off another shock.

Having called an election to build a big parliamentary majority to back her Brexit plans, prime minister Theresa May failed in the 8 June election, losing seats and emerging deeply wounded. Her Conservative party clings to power, just, but will now depend on sympathetic members of a Northern Irish party. May's personal credibility is shattered. In a speech after the election, the prime minister said: "Let's get to work". But it will be another surprise if the Conservatives let her stay in Downing Street for long.

By mid-morning on 9 June most of the votes had been counted and it looked as though the Conservatives had won 318 seats in the UK House of Parliament8 short of an outright majority. Opposition leader Jeremy Corbyn's Labour party won 262 seats.

Labour lost both the national vote and remains the second-biggest party in parliament, but Corbyn supporters were elated, believing the momentum is now on their side.

The result means another election could be called in the autumn. Even with the support from Northern Ireland, the Conservatives will have to ditch much of their agenda to get bills through the legislature. May campaigned on a slogan of "strong and stable" leadership. The vote is a humiliating response.

Crude and equity markets reacted immediately to the ensuing political chaos. The pound fell by around 2% against both the euro and the US dollar in early trading on 9 June. Brent futures also briefly fell in early morning trading down to below $47.50 per barrel, but later rallied to over $48/b.

Softer Brexit?

May replaced former Conservative leader David Cameron last year following his defeat in the EU referendum. That spooked crude, equity and currency markets, amid expectations of a slowing economy and reduced trade.

Both Cameron and May gambled at the ballot box, but seem to have been punished by voters angry at almost a decade of government-imposed austerity and cuts to social services.

May activated Article 50the beginning of the official process for the UK leaving the EUin April. This now means that the country has two years to sort out the divorce. The negotiations were supposed to begin on 18 June. Most analysts expect her position to be severely weakened in the talks.

It's the economy, stupid

Ahead of the June 2016 vote to leave the EU both Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, the European Central Bank, warned that Brexit would have a disastrous impact on the global economy, trigger capital flight from the UK-the world's fifth-largest economy, and have an impact on the rest of the Eurozone.

The immediate economic performance defied those predictions. But the uncertainty and paralysis in government policy on Europe-both main parties largely ignored Brexit during the electionhas started to weigh on the economy, which grew by just 0.2% in the first quarter of 2017.

Theresa May's promise of a "hard Brexit"leaving the bloc without a comprehensive free-trade agreementprompted the Organisation for Economic Cooperation and Development, to lower its UK GDP growth forecast for 2018.

Contraction in OECD Europe's third-biggest economy next year, made more likely now by the political instability, could have a marked impact on the region's demand. Consuming 1.6m barrels per day of refined products, the UK consumption accounts for over 11% of OECD Europe's total crude demand.

The lack of political clarity will also further cloud the uncertainties over the UK's access to interconnectors (which transport electricity from continental Europe), and the EU-wide emissions-trading system.

"The UK has until 29 March 2019 to leave the EU and its single market. We can already see here an issue for companies that have to look at a calendar year for their emissions and at the Brexit calendar, not to mention the deal/no deal issue," the Oxford Institute for Energy Studies said in a 9 June note.

The UK's domestic energy sector will also be feeling edgy. Policy is now far from settled. The Conservatives are pro-fracking (a contentious issue around the country) and have pledged to provide UK consumers with "the lowest energy costs in Europe". Corbyn's Labour party promised to place "social justice at the heart of our environment policies". He also wanted to ban fracking. If another election is in the offing, expect little progress on energy policy.

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