The stock market has been dismissing the recent plunge in oil prices.
West Texas Intermediate, the U.S. benchmark for crude, is down just over 22% since its late April 2019 high of about $66 a barrel. The commodity is now trading at roughly $53. That’s a decline of more than 20%, which is considered bear market territory. The S&P 500 (^GSPC) is down roughly 2% from late April.
“It’s a pretty big spread,” said David Nelson, chief market strategist at Belpointe Asset Management.
During past oil slumps, in early 2016 and the fourth quarter of 2018, stocks followed oil’s move lower.
“Oil and stock prices do tend to correlate over time as long as there’s not a military conflict involved,” said Nick Colas, co-founder of DataTrek Research.
Federal Reserve vs. Oil
This time around, the market is laser focused on something else: a Federal Reserve rate cut.
“What’s different now is that equity markets desperately want to see the Fed cut interest rates and lower inflation from lower oil prices helps that argument,” Colas added.
The market is pricing in a 21% chance that the Fed cuts interest rates at its next policy meeting next week, compared to a 13% probability roughly one month ago, according to CME data.
Driving the recent slump in oil is rising U.S. supply. On Wednesday, U.S. weekly crude stockpiles rose by 2.2 million, according to the Energy Information Administration (EIA), while analysts were expecting a weekly decline.
“U.S. stockpiles continue to surpass estimates,” said Art Hogan, chief market strategist at National Securities. “The net result is the price per barrel of oil is as much a reflection of the U.S. oversupplying the market, as it is a result of slowing global demand.”
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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