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Sharp Oil-Price Moves Worry Investors -- WSJ

26 Jul 2018 6:32 am
By Amrith Ramkumar 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 26, 2018).

Oil has diverged from stocks, other commodities and emerging markets since the imposition of U.S. tariffs on steel and aluminum at the end of May -- a sign that recent volatility could continue challenging big buyers of fuel.

Concerns about output from several major producers have recently dictated moves in the oil market, traders said, even though prices are usually linked to economic growth because fuel consumption normally rises with more robust trade and economic activity.

At the same time, the threat of tariffs slowing the global economy has roiled other markets, sending copper down about 15% from a June 8 four-year high and briefly pushing Chinese stocks into a bear market.

Oil, meanwhile, has risen about 5.4% during the same period. The discrepancy is a sizable shift from last year, when stocks, commodities and other risky assets rose together, lifted by a synchronized global expansion.

This year, growth momentum outside the U.S. has waned, pressuring multinational companies as they contend with rising interest rates and a strong dollar.

Analysts say the reversal in correlations in recent weeks is a sign that oil's typical relationship with global growth might not be holding, potentially changing how everyone from drivers to airline companies gauge fuel costs.

The shift also means that investors trading multiple assets normally tied to global growth have had to adjust rapidly to changing market conditions.

"Investors are probably looking at a more volatile environment for the price of crude, which may also cause some impacts to hedgers," said Nathan Thooft, senior managing director of global asset allocation at Manulife Asset Management. "It's something companies have to think about."

Anxiety about global supply has swung oil prices in both directions. U.S. crude prices hit their highest level since 2014 in late June, but have fallen 6.5% this month after signs that production from Libya, Saudi Arabia and Russia could increase.

Still, oil is up about 45% in the past year and is the eighth-best-performing asset in the world in 2018 through Tuesday, according to a Wall Street Journal analysis of nearly 120 assets that include stock indexes, bond portfolios, currencies and commodities.

Oil prices have moved wildly in some recent sessions even as the stock market hits a summer lull marked by low trading volumes and muted moves.

The correlation between oil futures and the S&P 500, measured on a 20-day rolling basis, fell to its lowest level since May 2017 earlier this month, according to WSJ Market Data Group.

Correlations between oil and other assets, including the MSCI Emerging Markets Index and S&P GSCI Non-Energy Index of other commodities, also recently fell below -0.7, indicating an inverse relationship, though they have since moderated.

Correlation is measured on a sale of minus-1 to 1. A reading of minus-1 means two assets are moving in the opposite direction, while a correlation of 1 means they move in tandem.

"You've seen such independent factors that move the commodity," said Craig Hodges, a portfolio manager at Hodges Funds, which is overweight energy stocks. "It's trading on its own supply-demand equation and less of what's going on growth-wise and in the world."

The prospect of an economic slowdown in China is of particular interest to commodity investors because the country has consumed huge amounts of materials as its economy has grown. Last year, it dethroned the U.S. as the world's biggest importer of crude oil.

China's economic expansion slowed a notch in the second quarter, according to data released last week, weighed down by a government-debt cleanup. That is even before growth takes an expected hit from the trade fight with the U.S.

With investors anticipating that the U.S. will grow faster than other countries, the dollar has risen recently to its highest level in a year, making commodities more expensive to overseas buyers.

In recent weeks, prices of commodities from gold to soybeans have dived, yet oil prices have held on.

Traders are debating how quickly large producers like Saudi Arabia can ramp up supply in case a spat between the U.S. and Iran disrupts exports from the Islamic Republic.

Analysts have also raised the question of whether Russia might increase output at President Donald Trump's urging.

Mr. Trump has asked Saudi Arabia and other countries to increase supply and curb recent oil-price gains. And Libya has indicated in recent weeks it will resume exports at ports that were disrupted by recent rebel attacks.

Although prices have fallen recently, some investors think another supply shock could push them back up and reignite worries about higher inflation.

Specifically, some analysts worry that a continued oil rally would lead to a quicker-than-expected increase in consumer prices, which could give the Federal Reserve an even freer hand to push up interest rates.

"That could be a game-changer," said Doug Cohen, managing director of portfolio management at Athena Capital Advisors. "I don't think we're there yet, but it's certainly a risk."

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

(END) Dow Jones Newswires

July 26, 2018 02:32 ET (06:32 GMT)

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