Oil Prices and Stock Markets

You want bull markets, well, brace for higher oil prices. If you want to think that equity markets can go higher than current levels, are you prepared for oil to be in the region of $110? Airlines stocks brace for another shock? Oil and gas stocks may have more upside? What is important to consider is how OPEC views the current prices. Realistically, their minimum for most of them is around $80 for them to balance their budgets. They are happy of course with rising prices but they are also circumspect as to prices not being too high as to derail the recovery process for the US and EU. Looks to be staying highish for a few more weeks.
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High energy prices are supposed to be bad for profits.  But that doesn't necessarily mean they're bad for stocks.

Tobias Levkovich, Citi's top U.S. equity strategist, discusses the relationship between stocks and oil in his latest Monday Morning Musings note.

The S&P 500 has climbed a relatively impressive 11% year to date despite the recent retrenchment, easily outpacing Europe though lagging Asia, but it is a bit surprising to note that the S&P 500 Energy sector in only up 1.9%, underperforming the S&P 500. All the while, oil prices have climbed roughly 4%, even as it has backed off from highs seen in February. Investors argue that there is an Iran risk premium in the crude markets but it is also interesting to recognize that there is bullishness in the futures markets over oil based on CFTC data. Yet, at the same time, investors have become far less excited about Energy stocks, with our institutional client survey conducted several weeks ago finding less interest in energy names relative to the two prior surveys in October and January. To be fair, this may reflect more optimism on the greenback which would influence per barrel prices as well.

Nevertheless, the equity market has been linked quite tight with oil prices over the past five years (see Figure 3), thereby making the recent divergence a bit more interesting. We suspect that some of the difference may be coming from the new developments in the US energy industry tied to technologies allowing for more deepwater drilling, horizontal drilling, shale gas and tight oil...

Here's a look at that remarkable correlation:

Read more: http://www.businessinsider.com/citi-oil-stocks-correlation-2012-5#ixzz1tb7eeBkF

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