$110 Oil May Signal Shift in Asset Correlation

by: Danny Furman

Elliott Wave International writer Vadim Pokhlebkin makes a clear presentation of the strong correlation between oil and stock prices in recent years. It is, however, undeniable that higher oil prices eat away at purchasing power consumers have. With gas now above $4/gallon in many parts of the country, many analysts have called $115 or higher as the price of oil that would threaten economic recovery in the U.S.

WTI crude oil has breached the $110 mark for the first time since 2008, and stocks immediately turned south. Indexes had been back near flat after an earthquake in Japan inspired a bit of panic selling. Whether oil is being driven by MENA turmoil, energy demand in Japan for rebuilding, or some other factor is less important than the psychological effect key levels have on investors. If $115 means certain struggle, $110 has a bright warning flag attached to it.

Problems created by expensive oil are worse for developed markets than emerging ones with lower consumption rates and greater natural resources. Investors therefore don't necessarily have to choose between exiting markets entirely and staying fully invested. Asset markets have been historically highly correlated ever since they all crashed in 2008 and an oil boom, this time around, may signal a paramount shift in macroeconomic focus from consumption to production. Wages in Australia certainly suggest so.

Leading Canadian oil stocks Cenovus Energy (NYSE:CVE), Suncor Energy (NYSE:SU) and Sunoco (NYSE:SUN) are all poised to benefit from an oil boom and aren't reliant upon production from the MENA region. Australia (NYSEARCA:EWA), Brazil (NYSEARCA:EWZ), Russia (NYSEARCA:RSX) and Chile (NYSEARCA:ECH) have growing domestic economies also deeply rooted in oil and other natural resource production. Another option is to invest in funds that directly track the spot price of oil, such as USO, USL and BNO.

Disclosure: I am long USL.