Oil And Financial Markets: A Bicycle Built For Two

Includes: OIL, RBL, RSX, USO
by: Matt Smith

I have a confession to make: I avidly collect charts. I have this nerdy tendency to snag a chart - be it on a Tuesday afternoon or early on a Saturday morning (as my kiddos watch Megamind for the 57th time). Then I store it like a butterfly in a jam jar, to occasionally revisit from time to time. So although distracted by other themes this week, I have been able to revert to a few charts from my collection to take us on a sudden detour, and illustrate how crude oil pices (NYSEARCA:USO) continue to move on a bicycle built for two.

This first chart is from just this week, and shows how crude is tracking the stock market, and cyclical equities at that (the performance of cyclical equities is closely tied to the overall economy). This is fascinating because even though there is so much geopolitical tension apparently being priced into crude at the moment, it is still seemingly following the business cycle. And cyclical equities are rallying like a mad thing:

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And this is a global phenomenon, as a certain ex-president (no, not a robber from the most excellent movie, Point Break) who just got re-elected is all too aware of. For such an energy-rich country as Russia, a rallying crude price (NYSEARCA:OIL) means a rallying stock market, (NYSEARCA:RBL), RSX which means a more amenable population:

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Next up is a chart from Capital Economics, which is a little dated, but highlights another strong tie to crude - that of its commodity comrade ... grains. By no means am I agreeing with their oil forecast (… at all, actually), but the historical trend highlighted between oil and grains since 2007 is strong. But this does mean that if you believe oil is heading lower, you have to believe that grains are heading lower also.

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But just as every cloud has a silver lining, just as every rose has its thorn, every rule has its exception. And here it is: the euro. After being in tandem with crude for so much of the global recovery in the past few years, the European debt crisis has weighed heavy on the euro like concrete boots. So after being a proxy of risk appetite for so long, the loss of confidence in the euro as both a region and a currency has detached it from crude like a motorbike from a sidecar.

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Brent crude (black line) vs. EUR/USD (blue line), 2010 - present

I sometimes wonder if I pay too much attention to general financial markets and need to focus solely on energy commodities instead. But given my background, it's difficult to separate or be discerning between the two.

The benefit of looking at the various ingredients in the burrito of financial life is that the movement in one can help solidify or undermine an opinion of another. It makes you question everything, which is excellent, and ultimately question yourself. Which is what it's all about. But enough from me. I leave you with one last insight; I thoroughly recommend Megamind. It's almost as enjoyable as a good chart. Almost.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.