Crude oil prices are up 2% this morning and pushing $50 after the weekly inventory report from API showed a larger than expected drawdown in stockpiles. Earlier this year, a 2% rally in crude oil prices would have been enough to put a strong bid in S&P 500 futures, but this time around equity prices saw no reaction to the uptick in crude prices. While equities are higher in early trading, the move in futures didn’t come until after the release of the September ADP report well after last night’s crude report.
In the last several weeks, crude oil and equity prices have become increasingly uncorrelated. This divergence can be seen in the charts below. There was a time earlier this year when crude oil and equity prices moved in lockstep with each other. In fact, from 1/25 through 4/26, the rolling 50-day correlation between the closing prices of crude and the S&P 500 was above 0.90 for 64 out of 65 trading days (two streaks of 32 straight days). To put this in perspective, going back to 1990, there have only been two other periods where the rolling 50-day correlation was above 0.90 for more than thirty trading days (December 2008 and October 2011), but this year we have already seen two separate streaks!
For the last few months, though, equities have managed to rally and make new highs even as the rally in crude oil consolidated. To us, the fact that equities have rallied even as crude has stalled is a signal that crude oil’s level is more important than its direction. As long as the price can maintain a floor of $40 and barring a spike induced by a geo-political event, the short-term moves in crude oil should continue to have much less of an impact on the direction of equity prices.