The unusual, tight relationship between oil and equity markets seen over the past two months could break down as swelling crude oil stockpiles eventually outweigh investor enthusiasm for a looming economic rebound.
Crude oil and equities markets, which have traditionally showed a negative correlation, have moved in relative lockstep over the past three months. Investors eyeing stocks for signs of an economic turnaround bet a quick rebound in flagging oil demand could follow.
But the steep overhang in crude supplies and ongoing weak energy consumption worldwide could eventually mute oil's response to a solid economic recovery and break the market's positive correlation.
"The economic optimism that has supported the stock market has also pulled up crude futures," said Amanda Kurzendoerfer, commodities analyst at Summit Energy in Louisville, Kentucky. "There's nothing on the oil demand side or fundamentals that could have triggered this development,"
Signs that the economic downturn is easing, including better-than-expected U.S. monthly retail sales figures and improving U.S. employment data, have helped lift stock markets -- widely seen as a leading indicator for economic growth.
Oil prices, which dropped from record highs over $147 a barrel in July to below $34 in February as the recession hit global energy demand, are currently topping $57 in part due to the stock market gains.
But analysts say that even if the economy begins to turn around, it will be a while before markets work through a huge crude oil supply overhang, which could force a decoupling of the equities/oil relationship.
"A decoupling is very likely if equities continue higher, simply because oil fundamentals are so weak," said Jim Ritterbusch, president of Ritterbusch & Associates.
He added that while it was hard to call the timing of such a decoupling, it could come as early as late May or early June if U.S. motorists ease up on holiday travel this summer.
"Once we get past Memorial Day, which is seen as the start of the summer driving season, we could start to see a realization that vacation demand for gasoline isn't going to be enough to clean up excess stockpiles. That sense could be what creates the disconnect."
Crude stocks in top consumer the United States hit a 19-year high last week, according to government data. Stocks of distillates, which include diesel used in shipping goods across the country, hit a record for April last month.
Analysts said consumer moves toward greater efficiency and lower fuel consumption could last beyond the economic downturn, pressuring demand further.
The administration of U.S. President Barack Obama also has made moving the fuel-guzzling nation toward greater energy efficiency and cleaner fuels a key focus of his economic plan.
"Every time we come out of a major oil shock -- whether it is because of the (high) price or a recession -- we have shifted to a lower level of oil intensity," said Antoine Halff, First Vice-President of Research, Newedge Group, New York, NY.
"Once the economy recovers I think we see lower oil intensity and greater efficiency."
Analysts note that despite the recent strong performance in stocks, May has traditionally been the start of a seasonal weak period for stocks. This could keep the correlation in line if fundamentals begin to weigh on oil.
Some experts also stressed that until the oil market begins to focus more on fundamentals, movements of equities should hold a strong pull over crude.
"The energy markets are operating on Sir Isaac Newton's first law of motion as applied to markets: 'A market in motion will remain in motion unless acted upon by an outside force,'" said Tim Evans, energy analyst for Citi Futures Perspective in New York, adding: "And so with the equity markets coasting higher against little apparent opposition, the energy markets are doing the same."
OEX Price at posting:
18.0¢ Sentiment: Buy Disclosure: Held
