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Page added on August 23, 2016

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The correlation between oil and stocks has broken down

The correlation between oil and stocks has broken down thumbnail

Crude oil and stocks used to have a tight relationship.

They typically moved in the same direction, and strategists were quick to cite a decline in oil prices as one major reason for any stock market weakness. For example, when stocks nosedived a year ago, on August 24, crude oil fell to a post-crisis low at the same time.

Investors in stocks were watching the implications of lower prices on oil-producing economies, energy giants, and so on.

But that relationship may be over. Around July, the correlation between stocks and oil broke down, HSBC Global Equity Strategist Ben Laidler highlighted in a recent client note.

On Monday, crude oil prices continued to fall, with West Texas Intermediate crude futures for October delivery down 2.6%, to $47.83 per barrel.

On Thursday, WTI emerged from a bear market. Chatter about a possible production-freeze agreement between OPEC producers at their meeting in Algeria in September was cited as one of the catalysts for the rally.

But this rise — and any further episode of oil sell-offs or strengthening — may not matter that much to the stock market as a whole.

“Sector performance has, however, been directionally similar to previous periods of crude price weakness, with defensives generally outperforming cyclicals,” Laidler wrote. Cyclical stocks move in tandem with the economy’s turn, while defensives are agnostic to its performance.

“Materials was an exception, and could experience downwards pressure on further crude weakness,” he wrote.

The materials sector includes the oil and gas companies whose bottom lines are directly affected by the slightest movements in oil prices.

“We are overweight the energy sector; see the market returning to balance, and 2017e Brent averaging USD60/b,” Laidler wrote. “The sector has the world’s lowest cyclically adjusted PE, and a high and relatively sustainable yield.”

The main stock indexes were little changed on Monday as crude oil slid, with the S&P 500 flat in mid-morning trading.

Business Insider



5 Comments on "The correlation between oil and stocks has broken down"

  1. onlooker on Tue, 23rd Aug 2016 2:57 pm 

    How about the correlation between Oil and the desire of people to end our dependence on it. On the other hand careful what you wish for.
    http://countercurrentnews.com/2016/08/police-cut-water-supply-native-americans-pipeline-protesters-skyrocket-number/
    Gov Orders Police To Cut Water Supply To Native Americans As Pipeline Protesters Skyrocket In Number

  2. Outcast_Searcher on Tue, 23rd Aug 2016 3:53 pm 

    Shouldn’t the clowns spouting this wait for more than a few days before proclaiming it? First, I notice they give no actual figures for the correlation between these measures for stocks and oil. (Yes, correlation is a number and can be calculated. So if you’re going to say the correlation has broken down, show us a historical graph of the CORRELATION, and how it is now much lower than previously.) Second, just looking at the period of their chart, it looks like such “breakdowns” in correlation have already occurred about four times prior to this in the past 18 month, by periods of divergence between the two lines on the graph (oil and global stocks).

    This looks about as “valid” to me as the constant claims that we’re in a global economic “depression”, etc by the hard crash doomers.

    If the tiny blip on the right of the chart should continue for, say, three more months and the gap gets to, say, 20 instead of perhaps 8, get back to us.

    It still might not mean much, but at least it would imply a meaningfully large divergence, compared to the roughly normal quarterly jiggles in the graph — and thus might actually be worth looking into.

  3. Apneaman on Wed, 24th Aug 2016 12:43 pm 

    Largest Oil Companies’ Debts Hit Record High

    “Some of the world’s largest energy companies are saddled with their highest debt levels ever as they struggle with low crude prices, raising worries about their ability to pay dividends and find new barrels.”

    http://www.wsj.com/articles/largest-oil-companies-debts-hit-record-high-1472031002

    Record debt and cannot replace reserves…………hmmmm sounds familiar.

  4. rockman on Wed, 24th Aug 2016 9:14 pm 

    I think an equally import discussion: the correlation between the stock market and the prime interest rate which varies with the actions of the fed.

    What’s interesting is that the prime increased from 1960 peaking about the time oil prices peaked in the late 70’s. And then has stair stepped down from there to the current rate which is exactly where we began in 1960.

    http://www.tradingeconomics.com/united-states/bank-lending-rate

    From the same link: Bank Lending Rate in the United States remained unchanged at 3.50 percent in June from 3.50 percent in May of 2016. Bank Lending Rate in the United States averaged 6.71 percent from 1950 until 2016, reaching an all time high of 20.50 percent in August of 1981 and a record low of 2 percent in February of 1950. Bank Lending Rate in the United States is reported by the Federal Reserve.

    What’s even more interesting is how the prime rate chart does a great job of mimicking the global GDP. Except when oil prices peaked around 1980 and the GDP took a bit of a dive.

    That’s a fair bit of info to chew on. Enjoy. LOL.

  5. brough on Thu, 25th Aug 2016 4:09 am 

    I think possibilly, our daily obession of checking the crude indicies (WTI and Brent) are coming to a close. There are several reasons for this.

    1. The US government is going to support the fracking industry through various financial insitution to oil independence from the rest of the world. Irrespective of the cost or the price of oil globally.

    2. The loss of correlation between the price of crude and the prices of petrol and diesel at the point of retail.

    3. The large chemical differences between light tight oil (LTO) and other crudes from around the world, leading to separate refinery runs. Even refineries developed specially for LTO. Note, for almost the first time in history the world has glut of petrol/gasoline and cat-cracker at refineries are becoming redundant.

    I think, maybe in the future we will be looking at various new global borses for products ex-refinery.

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