London Report: Energy boost from Iran deal lifts the FTSE

BRITAIN’S main share index rose for the first time in a week in thin trade yesterday as travel stocks rallied on expectations that a nuclear deal between oil-rich Iran and six world powers would help cut fuel costs.

Airlines IAG and EasyJet, and cruise operator Carnival, rose between two per cent and 2.8 per cent as crude oil prices fell after the deal. The deal will give Iran some relief from sanctions that have cut the country’s exports by more than half in recent years, helping keep Brent above $100 a barrel despite weak global demand.

While yesterday’s Brent price of $110 was well within its recent range, investors were speculating that future supply from Iran would help curb energy costs in coming years.

Fuel accounts for 30 to 45 per cent of an airline’s costs, according to Mark Irvine-Fortescue, an analyst at Jefferies, who estimates airlines largely hedge that source of costs six to 12 months ahead. “A lower oil price is not going to affect earnings for the next couple of quarters but clearly if this is a new, lower level then [airlines] will be able to start locking in more attractive hedged prices and these will start to feed through to earnings a little bit further out,” Irvine-Fortescue said.

Jefferies lifted its rating on EasyJet to buy from hold, and its target price to 1,620p from 1,470p, citing greater confidence in the group’s competitive position. On IAG, the broker lifted its target to 410p, from 355p.

On the flipside, shares in oil companies came under pressure. BP was off 0.7 per cent and Royal Dutch Shell off 0.4 per cent after the deal.

Energy services group Petrofac bucked the trend, rising 1.8 per cent after the firm said its joint venture with South Korea’s Daelim Industrial had won a $2.1bn contract in Oman.

The FTSE 100 rose 20.32 points, or 0.3 per cent, at 6,694.62 points, rising for the first time in a week and leaving it roughly two per cent below a five-month high of 6,819 hit on 30 October.

Trading volume on the FTSE was 35 per cent lower than the index’s average for the past three months on the first day of what is expected to be a quiet week due to Thursday’s Thanksgiving holiday in the US.

Equities remain supported by central bank stimulus, which has dulled returns in alternative asset classes such as bonds and cash, and by signs of a recovery in the British economy.

“I don’t see too many clouds on the horizon,” said Jeremy Le Sueur of 4-Shires Asset Management.