The FTSE 100’s weighting towards natural resources helped London’s leading index outperform European peers on Monday.
Oil majors were behind the FTSE 100’s relative outperformance on Monday after OPEC announced a supply cut that sent oil prices soaring. WTI and Brent oil futures contracts were both trading over 5% higher at the time of writing.
While higher oil prices will be welcome news to oil and gas investors, higher energy prices are the last thing governments and central banks want to see.
Over the past six months, subdued hydrocarbon prices have been a significant factors in falling inflation.
Rising oil prices could now threaten all recent inflation and interest rate forecasts for the rest of this year. They may also push back expectations of when interest rates will eventually fall.
Concerns about the impact of oil prices were most evident in US futures. S&P 500 futures traded lower before rallying back to break even.
“The world needed a spike in oil prices like a hole in the head. Just as one of the pinch points in the global economy had started to ease, Saudi Arabia and its counterparts in OPEC have unveiled a surprise output cut,” said Danni Hewson, head of financial analysis at AJ Bell.
“The decision by the oil producers’ cartel, unusually taken outside of any officially scheduled meeting, represents a flexing of its muscles and potentially a pre-emptive move as it anticipates a drop-off in crude demand relating to the collapse of SVB and ensuing banking crisis.
“It is this crisis which has helped box central banks in when it comes to their ability to control inflation as they have to think about their role in preserving financial stability too.”
Although OPEC’s surprise cut in production will cause a major headache for central banks and governments, Hewson spelled out the benefits of higher oil prices for the FTSE 100 index.
“Rising oil prices imply higher costs of energy, transportation and other areas like plastic. The heavy exposure of the FTSE 100 to energy and resources stocks is looking like an attribute again as index heavyweights BP and Shell help lift the index. It is telling that the more domestic focused and diversified FTSE 250 is down a smidge on Monday.”
BP and Shell were both in excess of 4% higher and added a significant number of points to the FTSE 100 on Monday. Centrica was up 2%.
The prospect of higher interest rates for a longer period provided support for the FTSE 100’s banks as Barclays, Lloyds and Standard Chartered and HSBC all added more than 1%.
