Crude Oil vs Equities Dislocation Continues
By Walter Kurtz, Sober Look
In this recent post we discussed the seeming dislocation between levels of crude oil price (in this case WTI) and US equities (S&P500). Some readers have pointed out however that this may be driven by unusually high US crude inventories (particularly in Cushing OK, where WTI futures settle). The US crude stocks have indeed been on the rise, materially above the 5-year range (see figure 1).
OK. Point well taken. But let’s do the same analysis using Brent crude (instead of WTI), which should not be directly impacted by US crude inventories in Oklahoma. Here we have the last 3 years of price data on a scatter chart – and the same anomaly still exists (in fact it’s even sharper today than before).
Again, it may be an issue related to global supply. But that should simply be a reflection of world economic activity. One would think the equity markets would be reflecting this contraction in growth as much as the energy markets have. That has not been the case, as US equities continue to be resilient in the face of the slowdown. It’s not clear however if this dislocation is sustainable going forward.
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| Figure 1 – Source: EIA |
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Figure 2 – Brent crude (instead of WTI) vs S&P500 (red asterisk indicates where we are today) |
4 Comments
S&P 1100, here we come!
What a surprise…
Interesting read below
http://www.foreignpolicy.com/articles/2012/06/19/the_coming_oil_crash?page=0,0
Thanks for the scatter plot of Brent futures vs. SPX. Either Brent crude prices come up fast, or it appears likely, anyway, that the SPX could be in for a rough time.
Apart from oil prices, what is a bigger downside risk for equities than major problems with big banks? The Moody’s bank downgrades together with dive in oil and commodities, and all the PMI’s showing slowdown, I just don’t see how we get out of this without Fed and ECB coming through with shock and awe. Even that might only postpone it for a few months.
Walter – I would recommend reading that Foreign Policy piece, not because I believe in a coming oil crash, but because the points made about potential Saudi political motives are important to consider. For now, they seem to act very much like price setters.
If the USA’s oil and nat gas supply is fully developed, combined with continued drops in crude demand, that might not be the case in the future.