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Oil’s disproportionate influence on the UK’s flagship UK 100 , coupled with some fresh and unwelcome GBP strength overnight (bullish flag?), is holding the index back from a breakout and potential reversal from 2017 lows. This after oil prices plunged back close to April lows yesterday.
The drop derives from official US Oil inventory data yesterday echoing Tuesday’s API print with a drawdown in Crude stocks. Normally a positive, this was easily overshadowed by an unnerving build in Gasoline stores – the first since Feb – and, even more importantly, by US production hitting its highest level since August 2015.
This merely adds fuel to the fire of uncertainty about rising onshore US production (shale/fracking) offsetting, even eclipsing, OPEC-led production cuts designed to buoy prices for oil-reliant nations still smarting from the new normal of much lower prices, way below the old $100/barrel.
As it stands, the likes of BP and RDSb are depriving the index of only around 8pts. Not a big number, granted, but enough to make the difference between the index getting back above 7120 overnight highs to attract back the bulls.
Don’t forget also that oil has an oft overlooked bearing on sentiment for the commodity sector as a whole (barometer for global demand), its impact stretching even further than the Oil Majors by way of the UK Index ’s multiple Miners.
RIO shares are only flat thanks to investors liking the read of its Q1 production report. Peers continue to struggle for traction under the weight of still weak metals prices amid an uncertain global outlook for geopolitics, growth and stimulus. This is compounded by no forthcoming assistance for the dollar-denominated space from a Greenback Index at 3-week lows.
This UK Index is at a critical juncture, just north of 2017 lows at 7090. There are 350 or 450 points available should we rally back to 2017 highs or drop back to December lows, respectively. Whichever way the index goes though, it’s likely that both Miners and Oil majors are on-board. Which could well be dictated by sentiment towards Oil prices.
Listen out for those OPEC headlines again, revived before next month’s OEPC-Russia meeting to assess the success of production cuts so far and decide whether to prolong their pact.
Mike van Dulken, Head of Research, 20 Apr 2017
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
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