City Index | Sep 16, 2019 16:22
It’s all about the oil
The FTSE opened in the red and languished there for the rest of the session. Weak data from China overnight stoked global growth concerns, whilst soaring oil prices boosted the oil majors but dragged on airliners and cruise company Carnival PLC (LON:CCL). Not even pound weakness was sufficient to boost the index.
There was only one subject that mattered today: oil. Traders have been unable to take their eyes off oil following attacks on Saudi’s oil infrastructure over the weekend. The oil price jumped 20% to over $70 per barrel, in its biggest leap in decades as production in Saudi was halved. Whilst oil has pared some gains and is hovering around the $66 handle, the focus is switching to how quickly supply can return to normal at the Saudi Aramco plant.
Geopolitical risk in the Middle East is nothing new. However, what we are seeing is a physical disruption to supply, as the attacks over the weekend cut half the county’s oil production. This equates to a disruption on as much as 5% of global oil production.
We can expect oil prices to remain elevated whilst production is disrupted, some reports suggest that this could be weeks. As supply returns, we can expect the price of oil to start declining back towards $62, should geopolitical risks ease as well. However, with the US “locked and loaded” awaiting signs from Saudi Arabia that Iran was involved, tensions in the middle east could get worse before they get better. Under these circumstances the price of oil could remain elevated for some time yet.
Weak oil demand could help price lower
However, let’s not also forget that the demand picture isn’t great right now which will dampen the oil price quickly. Most recently China’s industrial production figures disappointed overnight. Last week, OPEC lowered global growth expectations to just 3% for 2019. Furthermore, this is a bearish time of year for oil, as the driving season comes to an end. These factors should also help bring the price of oil lower.
Riskier assets decline, safe havens push higher
Given the soaring price of oil, it should come as no surprise that BP (LON:BP) and Royal Dutch Shell (LON:RDSa) topped the FTSE leader board, rallying over 5%. On the flip side, heavy oil users, such as cruise company Carnival PLC (LON:CCL) and British Airways owner IAG (LON:ICAG) both flew to the bottom of the index amid fears of heightened costs. The risk of elevated tensions in the Middle East dented demand for riskier assets, whist flows into safe havens increased. The Japanese yen and gold both pushed higher.
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Written By: City Index
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