Oil Loses Its Pull on Stocks and Currencies

By Riva GoldFeaturesDow Jones Newswires

Stocks and currencies are ignoring the oil price after previous periods of moving in lockstep.

Crude futures took a sharp turn lower last week amid disappointment at the outcome of a meeting of the Organization of the Petroleum Exporting Countries, but stocks continued to reach new records. Even commodity-sensitive currencies like the Russian ruble did just fine.

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Oil and stocks have moved in tandem at times in recent years, but the link between the S&P 500 and West Texas Intermediate futures, the U.S. oil price gauge, has continued to fall over the last two months, according to strategists at Brown Brothers Harriman.

The correlation between the percentage change of the S&P 500 and the change in the price of oil has fallen from nearly 0.6 in early 2016 to 0.18 currently, and even briefly dipped into negative territory in February, according to Brown Brothers Harriman. A correlation of 1 would mean oil and stock prices move by the same proportion in the same direction, while a correlation of minus 1 would mean they move proportionally in opposite directions.

The correlation began easing last year as investors grew more sanguine about the global economy, but the recent fall says more about the actual oil price, which has traded in a range throughout the year. That price stability has allowed investors to focus on other market influences outside of crude.

The energy sector comprises only about 6% of the S&P 500, according to FactSet, but oil prices have in the past had an outsize impact on the daily performance of the index due to their influence on how investors view global growth, inflation and wider risk sentiment. Steep plunges in oil prices in January and February of 2016 sparked fears that lower demand for oil was signaling a weaker global economy, sending the correlation between Brent and the S&P 500 up to levels not seen since 1990.

Now, "people spend most of their time talking about the supply side and OPEC" rather than considering what it all says about demand, said Charles de Boissezon, deputy head of global asset allocation at Société Générale.

Last week, OPEC members and other large oil producers, like Russia, agreed to extend an agreement to cut supply, but to a level that disappointed some investors.

OPEC's cuts have boosted the price but encouraged nimble U.S. shale producers to increase their production, capping the rise and ensuring that this market trades in a range. Many investors believe crude prices are locked in that range this year, but that this is something of a sweet spot for the global economy. Prices aren't too low to crush oil-dependent economies or trigger more defaults in the energy sector, nor too high to pressure the consumer.

"Nobody worries too much about the cost of oil," said Sam Stovall, chief investment strategist at CFRA Research. "People would just prefer more stable oil prices in a $50-$60 range rather than be surprised one way or the other," he said.

The influence of the price of oil on the performance of oil-related currencies has also diminished over the past year, as other more fundamental drivers have proved more influential, according to Lee Hardman, currency analyst at MUFG.

The Canadian dollar and Russian ruble, which have in the past shown close ties to the oil price, showed little reaction to the 2.7% drop in Brent crude last week. For Canada, investors are more focused on relations with the U.S., its largest trading partner and any changes that may be made to the North American Free Trade Agreement, said Mr. Hardman.

The Russian ruble meanwhile has benefited from its comparatively high yield, Mr. Hardman said, which can draw in investors borrowing from currencies with lower rates. The ruble is up 9% against the dollar this year, making it one of the world's best performing currencies.

There has also been little correlation between the daily performance of the price of oil and the dollar, Mr. Hardman notes. While there used to be a negative correlation between the two, the rise of U.S. shale production has mitigated that effect, he said.

To be sure, the correlation could soon shoot higher again. On Tuesday, copper and some other commodities were trading lower on the back of weaker oil, underscoring the influence crude still has on investors.

Also, while the S&P 500's energy sector is the worst performer so far this year, these stocks have also been the largest contributor to earnings growth in the first quarter, according to FactSet. That has come in large part from a recovery in crude from its lows in 2016.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

May 30, 2017 08:30 ET (12:30 GMT)