Tuesday, May 19, 2009

Oil versus...well, almost everything

Knowledge of physical oil supply, demand and inventories is essential to understanding oil values and price formation. However, oil markets do not operate in isolation. General economic conditions and market sentiment link all markets. The skill is determining why cross-market links are occasionally strong and anticipating when markets should decouple. It is also important to not put too much value on random coincidence of price movements in what may otherwise be unrelated markets.

To show the temporary nature of inter-market links, let's take a look at two markets which sometimes move similarly to oil. Let's look first at oil (NYMEX WTI) versus the stock market (US S&P500) over the past twenty years.

Now, let's take a look at crude oil (NYMEX WTI) compared to gold over the past twenty years.

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