Crude correlations

On an intraday basis, the price of WTI crude oil and other assets, such as U.S. Treasuries and the S&P 500, has been seemingly attached at the hip.

“Crude bedfellows,” (below) shows the rolling 60-day correlation between crude oil and five major asset classes: Trade-weighted U.S. dollar, U.S. equities (as represented by the S&P 500), emerging market equities (as represented by the MSCI Emerging Markets Index), the U.S. 10-year Treasury yield, and U.S. 5-year Treasury inflation breakeven spreads (the spread between 5-year TIPS and nominal Treasuries). 
The table validates the thesis that crude oil is very highly correlated with risky assets such as equities, government bonds and the inflation expectations that they represent. In fact, on a daily basis, according to this data, it would be a rare event to see the price of crude oil and any of these other major assets not moving in the same direction. 

What stands out to us the most is that crude oil’s correlation to U.S. equities — specifically the S&P 500 — has been dramatically higher during the last 60 days than its historical basis. 

For example, historically a lower price of crude oil has been a tailwind for the U.S. consumer, which boosts discretionary spending and consumer discretionary stocks, because the U.S. economy is largely service- or consumer-driven. 

Conversely, it is not uncommon to see the correlation between high beta assets such as equities and crude oil, during equity bear markets and when global growth is faltering. These current levels of correlation are close to what was being observed in 2008 and 2011. 

This is because crude oil is being directly linked to the health of the U.S. banking system, which has made a considerable volume of loans to U.S. energy exploration and production companies. Because the price of crude oil is lower, it impairs these companies’ ability to keep up such a high ratio of dividend payouts, and also increases the probability of widespread default across these companies as the price of crude oil falls substantially below their cost of production.  

The logical question that you would ask next would be, “What may cause a decoupling between crude oil and other major asset classes?”. 

If there is an inflationary impulse, which typically has been positive for “beta” assets like equities, and negative for government bonds, the correlation would remain relatively high. 

One scenario where we may see a decoupling of this correlation is a geopolitical event that would put the future supply of crude oil in jeopardy. Historically, a higher price in crude oil, on account of an exogenous shock also has been negative for risky assets and positive for inflation-sensitive assets, including government bonds. 

A more fundamental scenario that would lead to a breakdown in the correlations would be near the end of the cycle in the energy sector that includes a wave of bankruptcies, restructurings and M&A activity. From there the cleansing process can take place where future production capacity is eradicated, which allows the crude oil market to fundamentally rebalance future supply and demand.

About the Author

Neil Azous is the Founder and Managing Member of