Escaping the Oil / Stock Correlation with Gold

It is often difficult to convey news concisely, especially on complex issues such as oil. This week however has seen significant enough related action and commentary to warrant mention. 

Yesterday was another good example of how oil pricing impacts the Australian investor as the Australian market clocked up another circa 100 point loss with oil prices falling by as much as 4.5% on Tuesday night. BHP suffered with investors unimpressed by its profit results. 

Oil prices are a concern and there are many recent examples to provide context on how this relates to confidence in equity markets. This morning Bloomberg is running an article called “Another Oil Crash Is Coming, and There May Be No Recovery”. We recently heard from an Iranian minister offering sentiment damaging views on the latest plans to freeze production at January levels, labelling the idea as “ridiculous”.

Former Washington DC lobbyist, Lawyer and blogger Michael Snyder reported on Wednesday that over the last 18 months, oil has fallen close to 75% and with Iran sanctions dropped, more supply is in the pipeline. Last year alone, 67 US oil companies went bankrupt and CNBC is reporting that 35% of all remaining oil companies operating today are in danger of imminent bankruptcy. Also on Wednesday, Royal Dutch Shell announced the shutdown of its shale unit.

RT reported yesterday on the latest downgrades out of S&P. As pictured below, the credit rating agency has reduced the grades of 3 top European oil companies. Total of France, Statoil of Norway and BP of the UK were all downgraded by 1 notch based on belief that the oil market would only partially recover by 2018 and that oil prices would only rebound to about $50 a barrel by then. S&P further commented that the companies would likely struggle to meet the demands of lower investment expenditures while funding shareholder dividends. Earlier this month S&P moved to downgrade other oil giants like Royal Dutch Shell and placed negative forecasts on Chevron and Exxon Mobil. 

It’s no secret that depressed oil prices and worries regarding banking exposure to the higher cost producers are now a permanent concern for investors and as exemplified yesterday, equity followers could be excused for seeing a correlation between stocks and oil pricing. They wouldn’t be alone. RT’s Ed Harrison observed a “High degree of correlation between oil futures prices and the S&P 500” in an interview yesterday with Money Strong LLC’s president Danielle DiMartino Booth. He specifically mentioned declining oil prices as one of the three main drivers of stock market volatility as pictured below.

The take away here is that the poor fortunes of oil are related to the poor fortunes in the stock market and with shares being the classical DIY investment vehicle, one is motivated to search elsewhere for ways to grow or even simply retain wealth. Readers of yesterday’s news may have been suitably alarmed at the prospect of Aussie bricks and mortar investments at this time, further narrowing the options. 

In contrast, the performance and commentary around gold overnight is telling in this environment.  US spot rallied $30 to exceed $1250 overnight before a pullback as pictured below. The media this morning is attributing this move to further unease around oil pricing with the article “Gold surges more than 1%, amid flight to safety as oil weighs on markets” at being one example. USD gold has increased by around 16% for this year alone which is well on the way to being the strongest opening quarter for the metal in nearly three decades.