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Why Are Oil Prices And Stock Markets Diverging?

Oil prices

For most of this admittedly still young year, oil and the broad stock market have been moving in opposite directions. Crude futures (CL), even after a couple of down days, finished yesterday around 12% higher than they closed out the year, while the S&P 500 was about 6% lower than on December 31st, 2021. That is a big difference over just three weeks, so why is that happening and, more importantly, what does it mean?

There are a lot of reasons why those two markets might move in opposite directions for a while without it being particularly remarkable or significant. The obvious one is that crude pricing has a supply element to it, and supply dynamics can change for any number of reasons. There could be either worry about or the actuality of a temporary disruption to output in one geographic area due to war or natural disaster, say, or there could be an OPEC-like agreement to restrict crude output to influence price.

Both of those apply to some degree to the current situation, but neither fully explains the disparity.

Geopolitically, there is some nervousness about the Russian presence on the Ukrainian border but, as a Ukrainian friend pointed out to me the other day, Putin’s troops have been “amassing” on that border for around eight years now. That doesn’t mean that there won’t be a crisis this year, but it does put the chances of one coming soon into perspective. And, as I’m sure you are aware, OPEC+ has an agreement in place to limit output. Once again,…

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