The positive impact on the FTSE 100 from a higher oil price started to diminish on Tuesday as attention began to shift back to the wider economy and the next move by central banks.

Yesterday, a surprise OPEC production cut lifted shares in heavy weights BP and Shell. A repeat of those gains was absent on Tuesday and the FTSE 100 underperformed Europe.

The FTSE 100 gave up early gains to trade just 0.1% higher at the time of writing, while the German Dax gained 0.8% and French CAC added 0.5%.

Markets are faced with the decision to either focus on recent robust earnings and relatively healthy economic data, or attempt to predict the next move by central banks. There is also the threat of a US recession.

“The surprise production cut from OPEC+ continues to stoke concerns around inflation, with brent crude trading over $85 a barrel. There are some outside concerns this could encroach on the $100 mark once more, which would have legitimate ramifications for monetary policy and has already led to a reduction in short positions in oil,” said

From a technical perspective, broad equity indices have rebounded from oversold territory following the banking crisis saga and the opportunity to pick up bargains is dwindling.

The completion of this short-term mean reversion trade adds to the lack of clarity on UK stocks’ next move.

This was evident in FTSE 100 stocks on Tuesday with 86 of the 100 constituents moving less than 1% at the time of writing.

Vodafone was the FTSE 100’s top faller as the telecoms group fell 1.4% and hit the lowest levels since mid-February.

Glencore was the top gainer, up 2.2%, after it had its attempt to takeover Teck Resources rejected yesterday. Glencore had offered a 20% premium to Teck’s shares.

“The prospect of mega deals in the mining space has got investors excited, bringing a new lease of life to the sector which had previously been suffering from fears about weaker economic activity feeding through to reduced commodities demand,” said Danni Hewson, head of financial analysis at AJ Bell.

“Glencore led the FTSE 100 higher on Tuesday following its $23 million move on Canada’s Teck at the start of the week. While its business combination proposal was rejected, Glencore is likely to be persistent in its pursuit for greater things which means one cannot rule out a higher offer.

“Teck’s board said it wasn’t contemplating a sale of the business at this time, yet there is a price for everything and so it all boils down to how much Glencore is prepared to pay.”

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%.

Cineworld shares sank on Monday as equity holder value destruction ratcheted up with developments in their restructuring plans.

New equity will be issued to lenders as part of a restructuring deal. Cineworld also announced a rights issue to raise additional capital. The rights issue will be offered to existing lenders and seeks to raise $800m.

Cineworld said their restructuring plans do “not provide for any recovery for holders of Cineworld’s existing equity interests.”

Cineworld shares were down over 22% at the time of writing. 

“Cineworld’s shareholders had been given plenty of warning their investment in the business could be wiped out by a debt restructuring and this looks like it will soon happen. The company’s lenders are going to gain control through a debt for equity swap and a rights issue, giving Cineworld yet another throw of the dice to try and sort out its finances,” said Danni Hewson, head of financial analysis at AJ Bell.

“Keeping the US and UK operations and only potentially selling its Eastern European and Israeli sites will streamline the group and put it in a better position to ride the recovery in the cinema industry – if it comes.”

Hewson continued to explain the deep issues facing cinemas with the rise of streaming platforms.

“That’s a big ‘if’ as competition from streaming platforms has become intense and film-lovers are increasingly happy to watch new releases at home. It helps that gigantic flatscreen TVs are much more affordable these days, as are speakers, so it is easy to create a good cinema experience in the home.”