What Does Crude Oil Back Under $50/Barrel Mean For Equities Investors?

The S&P 500 has continued to push higher in the past month, but oil investors aren’t enjoying the Trump Rally as much as anticipated. Following OPEC’s historic production cut agreement back in November, WTI crude oil prices surged from around $45/bbl to above $50/bbl in a matter of days. For three months, oil prices stayed in the $50–$55 range until recently breaking back down below $50 once again.

The latest dive can be attributed to new record-high U.S. crude oil stocks reported earlier this month. While OPEC has dialed back production, many U.S. producers jumped back into the game as soon as crude oil prices showed signs of stabilization. Rising storage levels seem to indicate that many of these U.S. producers jumped the gun, and supply builds have now driven oil prices back down.

That dynamic is certainly bad news for United States Oil Fund LP (ETF) USO investors, but could it also be bad news for the SPDR S&P 500 ETF Trust SPY and the rest of the stock market as well?

Cruising On Crude

Crude oil prices and stock prices have certainly demonstrated a relatively strong correlation in recent years. Last year, former Federal Reserve chairman, Ben Bernanke, pointed out that the correlation between stock prices and oil prices from mid-2011 to early 2016 was a relatively high 0.39.

That correlation seemed especially strong during the opening months of 2016. From Jan. 1, 2016, to Feb. 11, 2016, WTI crude prices plummeted 28.9 percent to new multi-year lows below $30/bbl. In that same stretch, the S&P 500 fell 9.1 percent.

Fortunately, both oil prices and stock prices quickly recovered. Since oil prices bottomed last February, WTI has climbed 83.0 percent, while the S&P 500 is up 29.8 percent.

In the past month, however, the correlation between oil and stocks seems to have broken down. The S&P 500 is up 1.0 percent, while WTI crude prices have fallen 10.2 percent.

Falling crude prices are certainly cause for concern for stock investors, but they may not necessarily be a sign of an imminent stock market selloff. Ned Davis Research found that the historical correlation between oil prices and the Dow Jones Industrial Average total return since 1983 is a nearly negligible 0.09. In addition, when WTI crude prices initially collapsed by nearly 50 percent in the final seven months of 2014, the S&P 500 delivered a 6.9 percent gain during that same time.

Related Links:

The Baker Hughes Rig Count Explained

Todd Gordon's Oil ETF Trade