Oil and Energy Stock Correlation

Below we highlight the rolling one-year correlation between the daily price changes (%) in oil and the S&P 500 Energy sector.  As shown, from early 2004 through the middle of 2006, oil and oil stocks became more and more correlated.  But after the peak in correlation in 2006, it has been steadily decreasing.  Interestingly, the correlation increased during the first big run-up in oil from about $35 to $75. 

However, the most recent run-up from $60 to $140 has seen the correlation between oil and oil stocks decrease, as oil the commodity has left the stocks behind.  For bubble theorists, this decline in correlation helps their argument because it shows that the commodity has taken a life of its own.  It will be interesting to see how this relationship does going forward.

click to enlarge

Comments

[paultaut]

Good points.

There are two other charts worth a visual:
1 year exxon, XOM, and 5 year XOM.

There is no sign of a bubble. It looks like a staircase and step 2 is within 5% of breaking down but until it does so the trend remains up.

If one looks at the width of the first step, the evidence seems to say that a 3rd step may be imminent. In recent days, XOM has been resisting the head fake WTI is presenting.

For all the talk about Traders manipulating the Oil complex, the biggest one of them all has been Congress.