What Do Higher Oil Prices Mean for Equity Markets?

Oil hit a 6-month high in response to a White House decision to eliminate waivers that allowed purchases of Iranian crude: international benchmark Brent crude spurted more than $2 to over $74/bbl. The policy shift could spark a confrontation between the US and China, which plans to continue purchasing Iranian oil. Trade tensions notwithstanding, higher oil prices support stronger equity markets.

Thanks to America’s transformation from the largest crude oil importer to one of its largest producers, equity market movements have been positively correlated to the path of the slippery commodity. The correlation between the S&P 500 and crude over the last year was .65, a relatively cozy relationship.  Stocks and oil both peaked at the beginning of October and bounced last Christmas. Brent, incidentally, is up 38 per cent so far this year.

Crude has rallied more than 1 per cent in 22 of the last 50 weeks. All 11 S&P sector groups gained ground on average when that occurred. Not surprisingly, energy shares led the way higher, rallying 1.7 per cent, with industrials in second place, gaining 0.8 per cent, on average. Master Limited Partnerships led asset classes higher, but that connection is obvious. Not quite as obvious, international small caps and emerging market equities have also been beneficiaries of oil price increases, gaining 0.7 per cent on average.

Despite President Trump’s protestations, high oil prices reflect improved global economic activity. That’s something global investors can rally around.