If ever there was proof that Crude oil has a major influence on the UK 100 today was it. OPEC looks set to roll back by less than expected on the production cuts which helped oil prices almost triple from early 2016 $30 lows to recent highs of $80. Today’s news has helped the UK Index extend its rebound from 6-week lows to trade up 115pts for the day.

What’s driving today’s rally? First off, big name Oil companies. Think BP and Royal Dutch Shell; #2 and #3 heavyweights on the UK 100 , at 5.6% and 4.9% weight, respectively (10.5% combined). Seeing as you ask, only HSBC is bigger, at 7.1%, and along with its peers the Banks sector makes up an even bigger 13.7%. But that sector is for another day, and a very different discussion.

Back to the UK Index ,  up 115pts for the day (+1.5%; biggest up day since +2.3% on 5 Apr). Via their big weight, BP and Shell shares, up around 2.6% a piece, are contributing 25% of the index’s 115pt gain (15pts and 14pts, respectively; 29pts total). Simple. However it doesn’t end there, because there’s another sector rather sensitive to oil prices, also benefiting nicely and contributing positively. The Miners, which tend to get swept along by higher oil prices, even if they themselves are not heavily involved in producing the black stuff.

 So, after BP, Shell (and HSBC) the next biggest UK Index helper today is Glencore (shares +3.8%, contributing 7.9pts to the index), followed closely by Rio Tinto (+2.2%; 4.5pts), BHP Billiton (+2.3%; 3.0pts), Anglo American (+3%; 2.6pts) and Antofagasta (+2.1%; 0.8pts). So on top of the 10.5% weight of UK Index Oilers, via the Miners we have another 8.8% weighting of the UK Index whose share prices are pointing north and, more importantly, contributing another chunky 18.4pts.

So adding Oil and the Miners together gives us 19.3% of the index by weight, contributing just shy of 50pts. With the index up 115pts, that implies 19% of the index contributing 43% of its gains. As I said earlier, if ever there was a day to understand the UK Index ’s sensitivity to oil….

So next time you look at the UK Index it might be worth your while taking a glance at what oil prices are doing. Just so you have an idea of how that major driver is trading (reminder: 19% of the index is sensitive to Crude prices) and where it might be headed. However, that’s not to say that oil is the only driver for the UK Index and its Oi majors/Miners. Far from it.

Commodity prices (metals and oil) are dollar-denominated meaning strength in the US currency tends to be a negative, making them more expensive for non-dollar buyers. That said, the corresponding weak GBP can actually help Oil and Miners (and the many other internationally-exposed UK Index names) by flattering the value of their foreign currency denominated (USD, EUR) profits and dividends. Some days the latter prevails, some days the former does. It can be a case of which way the wind is blowing on any given day. Today, for example, USD is weaker, helping commodities while GBP is stronger, normally a hindrance for shares. That said, the stronger Crude price overpowers both today, in spades.

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Enjoy the sunny weekend and, of course, plenty more World Cup football.

Mike van Dulken, Head of Research, 22 Jun 2018