The oil and gas sector index rose 2.3 per cent, tracking a rise in the price of crude.
That came after the International Energy Agency said it expected demand growth next year, and Citigroup raised its Brent forecast for 2012, citing supply disruptions and low inventories.
“Remarkably resilient” oil prices helped oil and gas shares retain top spot as investors’ preferred sector for a seventh consecutive month in December, a survey by BofA Merrill Lynch showed.
“What we typically find in recessions is that at a certain point, it [the oil and gas sector] takes very defensive characteristics in terms of cash flow, dividend and visibility and that’s what we’re really seeing now,” Gary Baker, head of BAML’s European equity strategy, said.
Petrofac confirmed the theme, raising its profit guidance for this year and saying a $10.6bn (£6.8bn) order backlog gave it the confidence to predict strong growth in 2012.
The oil company’s shares were the biggest gainers in the FTSE 100, surging 5.1 per cent on volume of 160 percent of their 90-day average.
However, equity weightings in investment portfolios are historically low due to weak liquidity and uncertain corporate earnings, BofA-ML’s study showed.
In a sign of investors’ scepticism towards equities, volume on the FTSE 100 was less than 80 per cent of the 90-day average as the index closed 1.2 per cent higher at 5,490.15, after hitting a day low of 5,413.70 in morning trade.
“We see a lot of wide daily ranges and this could be the result of day traders and lack of liquidity in markets,” Roelof-Jan van den Akke, senior technical analyst at ING, said.
Van den Akke expects the FTSE to record a loss this week, hit by a strengthening in the dollar, before closing the year at around 4,800 to 4,900 points, an annual loss of between 9 per cent and 11 per cent.
After the close, investors were awaiting details from the Federal Reserve’s Federal Open Market Committee final scheduled meeting of the year.
The US central bank was expected to hold off on offering the economy any fresh stimulus as it weighs encouraging signs on the recovery against the risks coming from Europe.
Shares in continental Europe also ended higher in thin trade as firmer crude prices boosted energy stocks. The market cut gains, however, after sources said German Chancellor Angela Merkel was against a raising of the funding limit for Europe’s future bailout fund.
The FTSEurofirst 300 index of top European shares provisionally closed 0.5 per cent higher at 972.12 points after rising to a high of 978.94 earlier in the session.
“Merkel’s comments prompted investors to take some positions off the table very quickly after a very strong run in the recent past,” said Joshua Raymond, Chief Market Strategist at City Index.
“We have started to see lower volumes as well, which make the moves exaggerated.”
Volumes were low, at around three quarters of the 90-day daily average. The oil and gas sector topped the gainers’ list, up 2 per cent after American crude futures rose more than 2 percent to trade near $100 a barrel.