Energy and Mining stocks are topping the UK Index this morning with gains of 2-3% after Brent Crude Oil broke back above the symbolic $50/barrel 6-month highs overnight and an easing in US Dollar strength benefits the greenback-denominated raw materials space as a whole. Sceptics will point to the breakout by oil – inspired by a drop in US oil stockpiles on top of falling US output and global supply problems – as likely attracting shale/frackers back to idle rigs. And we have long since argued that US players have become the de-facto global swing producers, explicit about what price levels are economically viable for them, waiting in the wings for the right time to return. Especially with Saudi Arabia maintaining its stubborn stance on reducing output, favouring protection of its market share to the detriment of both its own finances and those if its OPEC colleagues.

Nonetheless, with the commodity driven by not just supply and demand, but also currency, there is potential for continued mixed US data (Kansas Fed Manufacturing to add to recent poor regional prints?) to result in a calming of both market nerves and dollar strength related to a Summer Fed rate hike. This could see the dollar pull back below 95, offsetting increases in US shale/fracking supply, helping keep the price of a barrel above that now key level $50. US Crude is knocking at the door as we write. Barrel arbitrage to be had? Or is a rising oil price set t
o foster the inflation that has long-alluded the Fed, thus making further rate hikes more likely? Only if corporates can pass on higher input costs via price hikes. If they can’t, it will only serve to dent profitability.

Mike van Dulken, Head of Research, 26 May