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Oil Price a Two-edged Sword

Investor sentiment in the UK was heavily influenced during January by the continued decline in the price of oil and developments in Europe – in particular, the mounting speculation over Greece’s future within the eurozone.

In a similar vein, the FTSE 100 index reached its highest level for four months following the European Central Bank’s decision to introduce a programme of quantitative easing measures.  Over January as a whole, the FTSE 100 rose by 2.8%, beating the performance of medium-sized and smaller companies. The FTSE 250 index rose 1.4%, while the FTSE SmallCap index rose 1.2%.

The oil price continued to drop in January, dampened by a combination of softening demand and strong supply. The price of Brent crude oil fell to its lowest level since early 2009 during the month, sliding below $50 (£33) per barrel. UK company announcements during the month provided tangible evidence of the effects of the oil price’s weakness. Royal Dutch Shell reported lacklustre profits while oil & gas exploration company Premier Oil announced spending cuts and postponed development work. Similarly, Tullow Oil was forced to announce substantial write-offs and to cut spending on exploration and development.  On a marginally brighter note, BP was boosted by signs that its disastrous oil spill in the Gulf of Mexico in 2010 might have been smaller than originally estimated.

It should also be noted lower fuel costs have provided a boost for other industries, including the airline sector. During January, budget airline easyJet released an encouraging trade update, which predicted a smaller-than-expected loss for the first half of its financial year.

The all-important Christmas trading period provided a tough challenge for some of the UK’s largest retailers. According to data compiled by Kantar Worldpanel , Tesco, Sainsbury’s, Asda and Morrisons all lost market share over the 12 weeks to 4 January, while Waitrose, Lidl, and Aldi increased their share of the market. Sainsbury’s revealed disappointing sales over Christmas and warned that trading conditions would “remain challenging” for the rest of the financial year. Elsewhere, Morrisons announced the proposed closure of 10 loss-making stores and also announced the departure of its chief executive. Tesco published somewhat better-than-expected sales over Christmas, and announced cost-cutting plans that include shutting 43 UK stores and closing its staff pension scheme. Credit rating agency Standard & Poor’s also downgraded Tesco’s debt rating to ‘junk’ during the month

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