The FTSE 100 retreated on Thursday in a second day of declines as investors digested the impact of OPEC’s decision to cut production by 2 million barrels.

Oil prices had declined steadily in recent months which has led to lower prices at the pump – a welcome saving as interest rates rise and household energy rates soar.

However, OPEC’s move to cut production will once again hurt consumers, just as winter heating bills start to erode household budgets.

The FTSE 100 was down 0.7% at 7,001 at the time of writing.

“With the oil price ratcheting back up there is also going to be more pain at the pumps to come, especially with fresh weakness in sterling. Brent crude is still hovering around $93, up around 10% in a week after OPEC+ countries agreed a cut in production at top of the range expected, by 2 million barrels of oil per day,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

“Higher oil prices might be inducing a severe inflation headache for many countries around the world, but they have been a bonanza for oil producers and they want the good times to continue to roll. Saudi Arabia has justified the cut because of weakening demand in the global economy brought on the continual ramp up in interest rates.”

Yet there were signs this ‘bonanza’ was coming to end on Thursday with Shell signalling an end to extraordinary profits.

Shell was the biggest drag on the index following a revision to their outlook due falling refining margins. Having enjoyed the higher price of oil earlier this year, the oil major said indicative refining margins would be $15/bbl in Q3, compared to $28/bbl in Q2 2022 due to falling oil prices through the summer.

Shell shares fell 4.7% and BP dropped 1.6% in sympathy.

Imperial Brands

Imperial Brands was the FTSE 100’s top gainer, adding 3.6% after the tobacco and vaping company said they would return £2.3bn to shareholders through dividends and buybacks as they deliver on their five-year plan.

“Imperial Brands’ update would give you the impression nothing bad is happening in the world. The cigarette and vaping company has so much spare cash sloshing around that it is going to return £2.3 billion to shareholders via dividends and share buybacks. That’s 13% of its market value, which is astonishing,” said AJ Bell investment director, Russ Mould.

US jobs data

Markets will receive the latest instalment of US jobs data tomorrow and a signal of what the Federal Reserve may do next to bring soaring inflation under control.

Economists polled by Reuters expect 250,000 jobs to be added in September.

Shell shares fell on Thursday as the oil and gas giant released an outlook update that highlighted falling refining margins due to lower oil prices.

Shell said they were revising their indicative refining margin to $15/bbl, down from $28/bbl in Q2 2022. This is expected to cause $1.0bn to $1.4bn reduction in Q3 adjusted EBITDA.

Shell shares fell over 4% in the immediate reaction on Thursday.

“Shell enjoyed record profits in the first and second quarter spurred by a surge in underlying oil and gas prices following Russia’s invasion of Ukraine. However, since June, oil has posted four consecutive months of declines, with Brent crude down by around 25% even after this week’s countertrend rally,” said Victoria Scholar, head of investment at interactive investor.

Today’s news of OPEC’s 2 million barrel production cut has supported oil prices but its difficult to see a scenario where oil rallies to 52-week highs without an additional shock to global supply.

Indeed, a slowing global economy may act as a cap on oil prices in the coming months.

Renewable Energy

While refining margins are set to fall, Shell indicated Renewable Energy adjusted earnings could be between a $300m loss and $300m profit.

With the appointment of the new CEO and his background in clean energy, investors will be watching how this segment performs as the bumper period for fossil fuels comes to an end.

Shell has invested in a range of clean energy projects in recent years and the revenue generation capabilities of these assets will be used to gauge the success of Shell’s energy transition strategy.

Shell is set to release Q3 results 27th October 2022.

The FTSE 100 gave back some of this week’s gains on Wednesday as short-term profit taking and concerns around the health of the UK consumers hit the supermarkets.

In a FTSE 100 index dominated by overseas revenues, Wednesday’s trade was dictated by UK facing companies as the UK’s supermarkets and retailers sank following Tesco’s interim update.

Tesco said their profit would be towards the lower end of guidance and revealed falling margins as the cost of living crisis drove consumers to budget lines.

Tesco shares fell some 3.6% while premium retailer Ocado saw its shares sink 5.8% as investors extrapolated Tesco’s results across the rest of the market. Ocado was the FTSE 100’s worst performer at the time of writing.

“Supermarkets are no strangers to dealing with cost-of-living pressures, there’s been an all-out price war in the industry for some years now,” said Matt Britzman, Equity Analyst at Hargreaves Lansdown.

“Amongst the larger players, Tesco’s arguably been one of the standout businesses in the battle against low-cost outfits but pressures on consumer spending can only build for so long before something must give.”

“That pain’s slowly starting to feed into performance, as shopping behaviours continue to normalise from bumper levels seen over the pandemic and inflation keeps costs high – that’s meant full year profit guidance got a slight downgrade toward the bottom end of the previous range.”

Sainsbury’s shares were 4.3% weaker ahead of their interim results in early November.

Truss Speech

Liz Truss’s conservative conference speech failed to ignite any further confidence in UK assets as GBP/USD fell 1% to 1.1360. Investors are awaiting the OBR’s economic assessment to gauge the impact on the UK’s finances and the Prime Minister’s speech provide no respite for concerns her mini-budget would cause economic difficulties in the short-term.

UK housebuilders have been one of the most heavily hit sectors since Kwasi Kwarteng’s fiscal announcement, and today Persimmon, Barratts Developments and Taylor Wimpey ended a three-day rally from their worst levels last week.

The FTSE 100 was down 1% to 7,015 at the time of writing.

Tesco is taking on discounters Aldi and Lidl in a price war as the cost of living crisis drives consumers to seek out better value products.

This was reflected in a growing revenue but lower gross and operating profit as Tesco sells an increasing amount of budget items.

Statutory revenue including fuel for the 26 weeks to 27th August was £32,456m, up from £30,416m in the same period a year prior.

However, despite group revenue growing 6.7%, gross profit fell to £1,723m from £2,448m a year prior.

The biggest impact on gross profit was an impairment charge caused by higher discounts. Statutory operating profits fell 43.6% to £736m.

Tesco have taken discounters Aldi and Lidl head-on with Low Everyday Prices and Clubcard Prices and is well placed to maintain their market share, but the retailer will see their margins suffer as a result.

“Tesco is in a better position to face competition from discounters. Our experts say Tesco has strong pricing power, a sufficiently wide range of products for customers to trade down in the store, and a big advantage in its Clubcard loyalty scheme,” said Orwa Mohamad, a Consumer Sector Analyst at Third Bridge.

“Aldi and Lidl may be gaining market share but this is mainly from Morrisons and Sainsbury’s as savvy shoppers hunt for bargains in the cost-of-living crisis.”

As well as revealing damaging impairments charges in their interims, Tesco also suggested the outlook was becoming even tougher as the cost of living crisis and higher interest rates further squeezed spending. Stopping short of an all out profit warning, Tesco said they saw profits towards the lower end of their previous retail operating profit guidance of between £2.4bn and £2.5bn.

“The uncertainty is palpable in the company’s outlook comments and inevitably this will make the market rather nervous,” said AJ Bell investment director, Russ Mould.

“On the plus side, Tesco is entering a difficult period with a decent market position and solid balance sheet.”

“However, it is hard to see the coming months as anything other than extremely difficult, with cost inflation affected not only by higher energy and labour costs but also the cost of importing goods from overseas thanks to lower sterling.”

Horizonte Minerals shares dropped on Wednesday after the group completed an oversubscribed £70.5m fundraise to help fund the development of their Brazilian nickel and achieving assets first production at Araguaia in 2024.

The Horizonte Minerals share price fell beneath the 90.5p placing price on Wednesday to trade at 88p at the time of writing.

Due to restrictions on making the offer available to retail investors, meaning Horizonte would have to produce another prospectus at a cost, the company opted to exclude retail from the offer.

However, any retail investors that would have liked to participate in the offer can now buy Horizonte Minerals shares at a lower price on the open market.

There was strong demand for the offer from institutions which was oversubscribed with the gross proceeds increasing from an initial target of £61.7m to £70.5m.

“I am pleased to announce the completion of the Fundraise. I would like to thank all existing shareholders for their continued support and welcome our new shareholders as we work towards first production at Araguaia in Q1 2024 and in parallel progress feasibility work at Vermelho,” said Jeremy Martin, Chief Executive Officer of Horizonte.

“Significant progress has been made since we broke ground at Araguaia in May and we remain well positioned to transition into a scalable Tier 1 nickel producer. We look forward to updating the market as construction advances at Araguaia.”