The sharp rally in oil prices at the end of last week came to an abrupt halt on Monday, with WTI and Brent both trading down more than 3 percent by midday.
The oil markets took another look at the fundamentals of oversupply after the largest two-day rally in seven years. There were a few reasons for this. First, China released new data that showed a decline in diesel consumption in 2015 compared to a year earlier. The figures added weight to growing concerns about a slowdown in the Chinese economy.
Also, at a conference in London on Monday, comments from Saudi Aramco Chairman Khalid Al-Falih were not received well by the markets. The chairman of the state-owned company said that it could withstand low oil prices for “a long, long time.” Moreover, he said that the company is still investing heavily in new sources of oil production, a not-so-welcome position for depressed oil markets.
Global equity markets are also down, and have fallen in concert with oil prices at the start of 2016. In fact, oil and equities have tracked each other much more closely than usual in recent weeks and months. Typically, a rise in oil prices depresses stocks because high commodity prices act as a drain on consumer economies. The reverse tends to also take place: falling commodity prices provide a stimulus to consumers, which has pushed up equities.
More recently, however, falling commodity prices have raised concerns about global growth. That has commodity prices and global equities moving together more than usual. According to Bloomberg, the correlation between commodity prices and global stocks – surging to a reading of 0.5 – is at its most positive in over two years. In other words, more so than at any time since 2013, energy prices are moving up and down in concert with stocks, something that has typically been a rare relationship.
Meanwhile, safe-haven asset classes such as U.S. treasuries, the Japanese yen, and gold have performed better as of late. “The correlation between oil prices and equities has turned positive,” chief global economist at UniCredit Bank AG, wrote in client report on Sunday. The relationship is “wrong, and therefore temporary.”
By Charles Kennedy of Oilprice.com
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