Oil and Stocks Part Ways

One of the interesting developments this summer is that the previous relationship between oil and stocks seems to have broken down. For several months, the two asset classes were like waltzing partners. Wherever oil went, stocks weren’t far behind. Or maybe it was the other way around.

Either way, the relationship appeared solid. Even when both markets turned in early February, they turned together.

Lately, however, the two seem to have parted ways. It’s hard to place an exact starting point when this happened. I think something clearly broke down at the beginning of May. But by July, oil and stocks were no longer speaking.

According to the WSJ, the correlation fell to 0.77 although I’m not sure what time frame their figure indicates.

What does this all mean? That’s hard to say exactly. I think we’ve moved into an era where low oil prices are good — that is, until they’re not. There’s probably a point at which low oil is a net negative for the U.S. economy. I suspect that’s below $40 per barrel but that’s just a guess.

OPEC has noticed the lower price for oil and they’re going to hold a less-formal meeting next month. I strongly doubt they’ll come to any agreement on holding back production. The Iranians are recently off sanctions and they’re going to gun supply until they get back to pre-sanctions levels. The Saudis also don’t seem interested in cutting back production. My guess is that we’re going to see more downward pressure on oil this year.

Posted by Eddy Elfenbein on August 10th, 2016 at 11:30 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.