Crude gains boost oil stocks at expense of travel firms

Yesterday’s crude gains have been maintained, with the oil & gas sector gaining as a result. Meanwhile, markets are starting to turn their attention to tomorrow’s Fed meeting.

• Markets mixed, with Middle East concerns boosting the Oil & Gas sector, with travel firms suffering

• Fed decision coming into view, with ECB QE putting pressure on tomorrow’s meeting

• Sirius Minerals slump as they fail to secure key funding

European markets are largely flat this morning, as a mixture of Middle East stability concerns and Brexit uncertainty are counteracted by the prospect of further central bank easing ahead. Crude prices have stabilised after yesterday’s jump, helping boost sentiment around the sector. It comes as no surprise to see oil & gas majors propping up the FTSE 100, but there is a negative side to higher oil prices, with travel operators TUI and Carnival both losing ground as higher costs eat away at their margins. The longevity of this oil rally is likely to come down to the geopolitical aspect as much as supply, with the sizeable knockout in output likely to be made up through backup inventories
from both the US and Saudi Arabia. However, it is the impact it has on Middle East relations that could provide the longer lasting shift in sentiment, with the prospect of military conflict ramping up once again. While relations seemed to have calmed after the Iranian attack on a US drone in June, Saudi Arabia could seek to take retaliatory action if this attack was proven to come from Iran.

Markets are starting to shift their focus towards tomorrow’s US rate decision, just as we come down from Mario Draghi’s parting bazooka ahead of his exit from the ECB next month. Markets fully expect a rate cut tomorrow, with the prospect of higher oil prices pointing towards further economic weakness given the drain on consumer spending and business margins. However, with the ECB now embarking on an open-ended QE programme, the comparative between the two sides could see the dollar rally if the FOMC continue to point towards a short-lived period of easing from the Fed.

Sirius Minerals lost over half its value this morning, as the miner pulled out of a financing agreement due to ‘poor bond market conditions’. Having previously warned that they could run out of money if a high-yield bond was not issued, there are fears that we could see the company fall flat despite plans for a huge potash mine in Yorkshire. While they state that funding has been secured for another six-months, the company is clearly running out of time, and traders are essentially playing roulette over whether the company will or won’t be able to secure funding in the coming months.

Ahead of the open we expect the Dow Jones to open 18 points lower, at 27,059.