Oil price spike hurts investors and fuels expectations for higher inflation

“One would have thought a major spike in the oil price would lead to a surge in the FTSE 100 given how Royal Dutch Shell and BP account for a large chunk of the index. However, the commodity price is not enough to lift the index, which fell 0.1% to 7,356 at the start of the new trading week,” says Russ Mould, Investment Director at AJ Bell.

“It seems that investors have been spooked by the attack on Saudi oil facilities and so they have flocked to seemingly safer havens, as illustrated by the 1% rise in the gold price to $1,503 per ounce.

“Among the main losers on the FTSE were oil consumers, miners, financial stocks and consumer goods companies (see details below).

“Markets were also weak across other parts of Europe and Asia where investors also had the same reaction to the oil price spike and how that might fuel inflation."

FTSE 100 sector movements 16 September 2019

Energy +3.0%
Utilities (0.1%)
Healthcare (0.2%)
Consumer non-cyclicals (0.6%)
Basic materials (0.6%)
Technology (0.8%)
Telecommunications services (0.9%)
Industrials (0.9%)
Consumer cyclicals (1.0%)
Financials (1.1%)

What the oil price spike means for investors

“A surge in oil prices as Saudi Arabian production was hit by drone attacks over the weekend has pushed shares in oil and gas producers higher.

“A 20% rise in the oil price is astonishing in relative terms and reflects the continuing importance of Saudi Arabia to global oil supply, despite the growing contribution made by US shale producers in recent years.

“Where oil goes next depends on the extent of the outage. Suggestions are that it could take at least a few weeks to get back up and running.

“There is the risk that the attacks lead to a significant escalation of tensions in the Middle East. The fact the US has pointed the finger at Iran and Donald Trump’s pledge that the country is ‘locked and loaded’ to respond does suggest that oil prices will factor in a greater level of geopolitical risk, at least in the short term.

BP managed a larger gain than Shell this morning off the back of the moves in the crude market; probably because it is more exposed to oil, whereas Shell’s latest strategy has seen it increasingly focus on natural gas projects.

“Oil exploration stock Tullow Oil got a further boost, alongside the catalyst from higher oil prices, as it revealed its second oil discovery in a little over a month offshore Guyana.

“This will increase confidence that Tullow and its partners, which include AIM outfit Eco Atlantic Oil & Gas, are sitting on a highly commercial project.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.