Crude Oil Distress May Be Bullish Signal for Stocks, BTIG Says
(Bloomberg) -- The unprecedented plunge in oil prices may actually be a bullish sign for both crude futures and U.S. stocks, according to BTIG LLC.
Large historic dislocations between front and second-month oil futures have traditionally been positive omens for markets, wrote strategist Julian Emanuel in a note Monday. At their most extreme, they have presaged “reliably positive” forward returns for the S&P 500 Index, energy shares and front-month contracts, especially on a six- and 12-month basis, he said.
“Though the times are extraordinary, such oil market distress in the past has signaled a prospective trough in equities, not a prolonged period of distress ahead,” Emanuel wrote.
May-expiry U.S. oil futures tumbled below zero on Monday for the first time as traders tried to avoid having to take delivery of the physical product because of low demand and a scarcity of places to store it amid rampant oversupply. The move was so violent and shocking that many traders struggled to explain it.
A 30-year analysis of the price differential between front- and second-month oil futures showed there was a gap of about -$2.74 a barrel at the bottom 1% of observations, according to BTIG. It settled at around -$60 on Monday.
Emanuel expects fluctuations in the market to continue Tuesday. A positive signal for energy shares would be June oil contracts staying above the psychologically important $20-a-barrel level, he said.
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