Does Rising Oil Signal A New FTSE 100 Bull Run?

We’re reaching the end of another week, and the oil price is ticking up again — as I write, the price of a barrel of Brent Crude has reached $36.75, which is the highest it’s been since the first week in January.

And the FTSE 100 has been poking its nose up above the 6,000 level on and off all week — in fact, as I write the top London index stands at 6,102.5 points, the highest it’s been since a brief look at 6,115 points on 1 February.

OPEC chinwag

News from the USA of a sharp rise in demand for petroleum products has helped push the oil price to current levels, even though inventory did also show a rise. But the biggest factor behind the firming up of prices seems to be the ongoing talks between oil producing nations aimed at cutting the supply surplus.

The latest news is that there’s another meeting on the cards scheduled for next month, which will be attended a number of the world’s big producers — including Saudi Arabia, Russia, Qatar and Venezuela. But one downside is that Iran will not be there — it’s really not too keen to see its output restricted just as the lifting of sanctions has allowed it to start exporting oil once more.

Meanwhile, the FTSE 100 looks set to put on around 150 points over the week, taking its two-week gain to about 390 points — and just about reversing the losses it had suffered since the start of the year.

Banks in from the cold

Banking shares have been partly behind the push. Lloyds Banking Group shares have gained 28% since their low of 11 February, boosted by the announcement of an extra top-up dividend on top of the expected payout, to take the year’s total to 2.75p — that’s a yield of 3.8% on the current 72.3p share price.

Barclays shares are up 13% over the same period, to 166p, though the recent gains at Royal Bank of Scotland were brought to a crashing halt after the bank revealed a £2bn loss for 2015. Even HSBC Holdings shares are up 10% since the same 11 February bottom, to 464p, despite no let-up in pessimism over China.

So is the future rosy now? Well, oil bears have pointed out that even if some kind of production freeze agreement is settled, it would still peg output only at around January levels and won’t do anything to reduce the oversupply that caused the price to slump so badly during 2015. And there is one economic model out there which predicts the price will fall to zero — but that probably says more about economic models than it does about oil.

Great FTSE bargains

And even if oil does still take some time to recover, I really don’t see low oil as being any great problem for most FTSE 100 constituents — in fact, if they’re net consumers then they should do well out of it.

So, while the optimism over oil might be premature, it will recover in the longer term because many producers simply cannot afford for it not to. And there are plenty of great FTSE bargains out there at the moment — it’s an income seeker’s dream right now, with companies like BP, SSE, Legal & General and Taylor Wimpey all offering prospective dividend yields of more than 6%.

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Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.