The Organization of Petroleum Exporting Countries (OPEC), which keeps the oil market on toes before its every crucial meeting, has sent ripples across the stock markets too this time, after Russia agreed with Saudi Arabia to extend by six to nine months a deal with OPEC.
Russian President Vladimir Putin’s announcement over the weekend on the sidelines of Group of 20 meeting, that Russia reached an agreement with Saudi to extend the oil output deal by six to nine months, followed by Saudi energy minister, Khalid al-Falih’s statement that the deal would most likely be extended by nine months and no deeper reductions were needed, has made the markets jubilant. Opec+, which includes Russia and other producers will officially take the decision in their July 1-2 meeting. The deal, which was originally struck in December last year, called for an output cut of 1.2 million barrels per day, the equivalent of more than 1 percent of global consumption. The cuts which were basically aimed at putting an upward pressure on the oil prices and check the oversupply was mainly contributed by the OPEC nations of 800,000 barrels per day and rest coming from Russia and other countries.
An extension of a deal to curb oil production is something being looked for, in view of relentless increase in supply from outside the organization, especially the United States. OPEC’s main producers’ in a bid to control prices at levels they consider acceptable, reduce their own output, while the higher prices encourage more production by the United States and other countries like Canada and Brazil, which has become the main cause of OPEC’s concern. Also, the slowing manufacturing activity in China too is weighing on, as it’s an indicator of a potentially lower demand for oil and oil products. Though, there is a light of hope with a truce reached by the United States and China at the G20 meeting, that the two countries might be able to resolve their trade war. After all, China and the US together account for one-third of global oil demand.
Oil prices are determined by the supply and demand of petroleum products and if the economy is not expanding, the decline in consumption adversely affects the demand. However, the proposal of extending production cut is most likely to get a support from Iran, which has endorsed the decision amid a weakening global economy. Iran’s oil exports slumped since the expiry of its waivers in May this year and imposition of new sanctions from the US. Iran’s share of OPEC production is around 8 percent and its present oil production level is lowest since 1980. However, the production cut decision is not likely to please the US which has been time and again calling the OPEC to pump more oil to keep US gas prices in check. OPEC nations who are largely dependent on money from oil had been reducing oil output since 2017 to prevent prices from sliding, though if the economic conditions deteriorate, the negative impact on their economy will probably grow.
FTSE 100 which had been showing a downtrend through the week, got a boost with the news and ended in green on the final trading day of the week, supported by the resource stocks. The probable OPEC agreement for production cut is going to support the markets further and will keep the resources stocks buzzing, on the same time anything unexpected could send negative signals through the energy and financial markets as well, as some smaller members of the OPEC are feeling being sidelined after the announcement by Russia and Saudi Arabia ahead of the meet.
It’s not only the resource stocks that are likely to keep their momentum going, but the other consumables stocks too are likely to get support with the production cut decision, as there could be increase in demand with the brightening of the gloomy outlook for the world economy. There has been fear of global economic growth slowdown that has put an abrupt pause to the oil price rally in recent days, affecting not only the commodity but the financial market as well. Equities or stocks basically follow the oil trend, as economic growth is essentially tied to the fuel demand and a firming oil prices indicates that economy is on recovery path.
FTSE 100 which had touched new two-year low in December last year after hitting a record high in May with oil prices losing ground, seems to have taken stock of the current scenario and has once again hit its two months peak, breaking through the 7,500 mark. The benchmark touched its highest level this year, reached on April 23, backed by the prospect of OPEC production cut and with US President Donald Trump pledging to pause any new tariffs on Chinese goods in the ongoing US-China trade war at G20 summit. Even though the truce is for a quarter only, where the two countries will have to sort out various issues, but the immediate respite from the escalating tension has led the stocks higher for now. FTSE 100 having a major constituent of Oil & Gas with weightage of around 18 percent in 2018, has evolved in last 30 years a lot and had become a benchmark representing global economy from a UK centric index, so the global factors like oil demand and trade war greatly affect it rather than the domestic affairs solely.
Oil major Royal Dutch Shell Plc had pledged returns of $125 billion between 2021 and 2025, as it expects new projects to generate cash as much as $35 billion a year by 2025.
BP Plc was another oil major moving higher with the latest development. The company’s performance has been improving recently backed by the investment in its upstream and downstream division.
Other oil producers like Tullow Oil, which had suffered severely during the worst fall of FTSE in December last year, on concern of declining oil prices and its impact on world economy, too have gained strength with hope of recovery in demand.
Premier Oil surged with the news, gaining over 5 percent. The company had already turned profitable after delivering an average negative earning over the last couple of years. The earnings were up by over 30 percent in the last financial year.
Not only the oil producers but the oilfield support services providers like John Wood Group Plc. and Hunting share too were on front foot, rising upto 4-5 percent, as a pick-up in oil and gas activity will increase the demand for support services. John Wood which had been lately benefitting from a pick-up in oil and gas activity in the Middle East, particularly Iraq is likely to benefit with the development further. Hunting Plc which had expressed its concern over volatile oil prices, is now likely to benefit with increased activity levels in the North Sea and Middle East.
FTSE 100 acts as a performance gauge of 100 biggest companies by market cap. All the companies listed in the FTSE 100 are constituent of the main market ‘London Stock Exchange’. The index which came into being in the year 1984 in a joint venture of Financial Times and London stock exchange, accounts for UK’s around 80 percent of equity value, though the composition of index shows a strong concentration of natural resources companies, which means the commodity market movement will have material impact on the overall movement of the index. The other factor associated with the index movement is that most of the companies listed in the index have vast operations overseas, hence any major development across the globe gets reflected on the movement of the index. The latest decision of US President not to trigger additional tariffs immediately on China, which he has been threatening since long and China reciprocating with its intent to make new purchases of US farm products, as part of renewed negotiations has boosted the market. Additionally, with the prospect of OPEC extending their production cut over six-to-nine months, the index has got a leg up and all its major components have started moving higher.
The index seems to be confident about the global economic recovery prospects and has extended the gains for yet another day, riding on the hopes of prospective OPEC deal of production cut and US-China trade truce, it has even overlooked US tariff threats on $4 billion of additional European Union (EU) goods. In a bid to increase pressure on EU, the US Trade Representative’s office (USTR) added 89 tariff sub-categories to its initial list which includes-olives, Italian cheese and Scotch whiskey – that could be hit with tariffs, on top of products worth $21 billion that were announced in April. While, the index as on whole was up by around half a percent, the oil majors Shell Plc, BP Plc too have added another half a percent gain to their last two days rally, showing a firm trend for the market.