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Correlation in Oil and Equity Price Movements has Recently Declined


The rolling 60-day correlation1 between daily percentage changes in the price of Brent crude oil (Intercontinental Exchange front month futures contract) and the Standard & Poor's 500 (S&P 500) equity index fell from +0.45 to +0.12 since August 16. As a very broad generalization, the correlation between oil and equity price movements tends to rise when current and expected demand developments are the primary concern of oil markets and to fall when supply issues are in the limelight.

Since mid-August, the price of oil has moved higher in the wake of growing crude oil supply disruptions and rising concern about the conflict in Syria. Global unplanned crude oil and liquid fuels disruptions averaged 2.7 million barrels per day (bbl/d) in August, the highest level since at least January 2011. EIA estimates that Libya's crude oil production disruption will average 1.4 million barrels per day (bbl/d) in September, up from the estimated 980,000 bbl/d average during August. While Syria itself is not a major oil producer, its proximity to major oil producers in the Middle East may raise concern about the possibility of tighter oil supplies if the conflict spreads. In the last week of August, Brent increased to reach its highest level since February of this year, while the S&P 500 declined recently.

Previous supply disruptions also lowered the correlation between oil and equity prices. In the spring of 2011, the correlation between price movements in oil and equities plunged when the disruption of Libyan oil supply during the Arab Spring conflict between the Qadhafi regime and its opponents led to a substantial rise in global crude oil prices. Significantly higher crude oil and petroleum product prices can have an adverse impact on projected economic activity, reducing companies' future expected earnings and thereby putting downward pressure on equity prices. Earlier, with the start of the Iraq War in the second quarter of 2003, the correlation between the movements of Brent and S&P 500 also declined sharply as crude oil prices rose with the disruption of supplies from Iraq.

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The correlation between daily percentage price movements in oil and equity can also be viewed from a longer-term perspective. From January 2001 to September 2008, the correlation averaged -0.04, demonstrating essentially no relationship most of the time with some periods of negative correlation. Since October 2008, the rolling 60-day correlation of the daily percentage change in the prices of Brent crude oil and the S&P 500 equity index (Figure 1) has been positive over 95% of the time, averaging +0.48.

The role of emerging market economies as both the driver of changes in global oil demand trends and a growing source of revenue for major publicly traded companies is a possible cause for the longer-term trend towards more positively correlated movements in oil and equity prices. In 2012, emerging market economies comprised 28% of the total world economy, as compared to 21% in 2003. As emerging market economies have grown, so has their demand for crude oil and petroleum products. While crude oil and liquids consumption by the mostly high-income developed economies of Organization for Economic Cooperation and Development (OECD) has been stagnant or declining for more than a decade, oil consumption in non-OECD countries has steadily increased and is projected to surpass OECD consumption in 2014. This shift makes economic news and information from emerging markets more important in crude oil price discovery.

At the same time, S&P 500 companies are increasingly reliant on emerging markets for the growth in revenue and profitability that are key determinants of equity values. The percentage of total sales of S&P 500 companies from sales outside the U.S. rose from approximately 41% in 2003 to 48% in 2008. Since then, sales from Asia, Africa, and South America have continued to grow while the share of sales from Europe has declined. As both crude oil demand and the value of S&P 500 equities are increasingly influenced by economic activity in emerging economies, movements in oil and equity markets in response to news regarding current and projected economic conditions in emerging economies are likely to remain positively correlated. However, as noted in the first part of this article, past developments affecting the oil supply situation have lowered this correlation. Any future supply shocks, either positive or negative, are likely to have a similar effect.

Gasoline price decreases while diesel fuel price is unchanged
The U.S. average retail price of regular gasoline decreased two cents to $3.59 per gallon as of September 9, 2013, 26 cents lower than last year at this time. Prices were up five cents on the West Coast to $3.80 per gallon; Rocky Mountain prices added half a cent but remained $3.63 per gallon. The largest decrease came in the Midwest, where prices fell six cents to $3.57 per gallon. On the Gulf Coast, the price was $3.38 per gallon, three cents lower than last week. The East Coast price dropped two cents to $3.59 per gallon.

The national average diesel fuel price was unchanged from last week at $3.98 per gallon, 15 cents lower than last year at this time. The East Coast price decreased half a cent, but remained $3.99 per gallon. The Midwest and Rocky Mountain prices both lost less than a penny to $3.96 per gallon and $3.93 per gallon, respectively. After increasing one cent, the West Coast price was $4.14 per gallon. The Gulf Coast price increased a tenth of a cent to remain $3.90 per gallon.

Propane stocks decline slightly
Total U.S. inventories of propane decreased by 0.1 million barrels last week to end at 64.5 million barrels, about 8.2 million barrels (11.3%) lower than the same week last year. Midwest stocks experienced an unseasonal decline of 0.3 million barrels last week. Rocky Mountain/West Coast inventories gained 0.1 million barrels, while the East Coast and Gulf Coast regions were up slightly. Propylene non-fuel-use inventories represented 4.6% of total propane inventories.

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