Daily market update: Markets rally on ceasefire, Shell

Investors’ wish for a ceasefire has been granted, triggering a rally across financial markets and pulling down the oil price.

The positive market reaction is understandable as a two-week ceasefire raises hope for a complete end to the conflict. Markets have been clouded by multiple kinds of uncertainty, from fears of higher inflation and rising interest rates to general unease over geopolitical relations. The ceasefire gives the world a moment to breathe and take stock of events. Unfortunately, there is no guarantee that everything will return to normal.

The 14% decline in the Brent Crude oil price to $94 a barrel puts energy prices in the right direction as far as businesses and consumers are concerned. However, it’s impossible to assume they will quickly return to the sub-$70 a barrel level seen before the Iran crisis began in March. There has already been considerable disruption to the flow of supplies and that might remain the case for some time, even if the Strait of Hormuz becomes fully functional again.

Potential damage to infrastructure and production shutdowns in the oil and gas industry, together with ongoing uncertainty over what happens after the two-week ceasefire ends, suggest oil prices might stay higher for longer.

Make no mistake – this is a pause in the proceedings and not a full resolution. That means any market rebound could quickly lose momentum unless there is clear progress with US and Iran talks.

For now, investors are happy to take the glass half full perspective. They’re looking to play a shift in market sentiment and buy everything that’s been beaten up in recent weeks and sell what’s done well. That means oil producers, utility providers and tobacco stocks have been cut loose and housebuilders, airlines and banks have been snapped up.

Economically sensitive sectors have struggled since March on fears over higher interest rates and a slowdown in business and consumer activity, so it makes sense that investors now see them as more attractive if there is hope for an end to the conflict.

A lower oil price means the foot has been taken off the inflation pedal somewhat, but it doesn’t mean that inflation is no longer a problem.

Consumers are already feeling the pain of higher oil prices when filling up their car or booking a flight, and the energy spike has gone on long enough to suggest more price hikes are coming on everyday items. Today’s retreat in the oil price is not deep enough to suggest that an inflation shock will be short-lived. Life is likely to get more expensive in the coming months, with or without a ceasefire. It’s just impossible to predict how long the higher cost of living environment will last.

Shell

While the big increase in energy prices should boost Shell's profit, the company also has a significant operational footprint in the Middle East which has been disrupted by the fighting. 

This dichotomy is reflected in Shell’s latest update, with gas production hit by this disruption but refining margins and oil trading revenue seeing an uplift. 

Inevitably, Shell’s shares have slipped lower this morning as markets react to news of a ceasefire between the US and Iran. The net result of this outcome being that oil and gas prices are falling, albeit they are still materially higher than pre-war levels.  

Shell has as much control over the trajectory of the price of its core products as King Canute had over the rising tide. 

The sheer volatility in commodity markets is reflected in wild swings in Shell’s working capital and, for all the benefit the company might enjoy from elevated energy markets, it comes with complications and headaches too. 

To set itself on a sustainable path, Shell needs to look through the short-term noise and work out how it will deliver growth over the long term. 

Chief executive Wael Sawan has won praise for the discipline injected into Shell’s business model, but his next job is working out how to replenish a reserve base which has been diminished by disposals and reduced spending.