Oil Is Pricing In Omicron Impact, Stock Market Should Be Next
(Bloomberg) -- It’s difficult to measure how much the omicron variant is affecting the economic recovery. But what’s happening in the oil market looks troubling -- particularly for stocks.
Should the spread go negative, the oil market would be in contango, meaning that current demand isn’t as strong now as it is further out in the curve. That’s usually a sign of too much supply in the market, and it encourages traders to store oil and sell it in the future to capitalize on higher prices down the road.
Oil price movements offer the closest possible reading of Covid’s impact on the economy, primarily due to its role in powering transportation. It also has a close relationship with the stock market. The 40-day correlation between crude and equities hasn’t been this strong since August 2020, when the first wave of the coronavirus was spreading to the southern U.S., raising questions about the summer driving season.
The International Energy Agency said oil supplies are rebounding around the world, with more coming next year. Meanwhile, demand for jet fuel has already started dropping in response to the omicron variant, but the IEA says the impact is likely to be limited as vaccine booster campaigns roll out globally. From a growth perspective, it makes sense that stocks would trade on the same signals. But both assets face the same question: Do policy moves by the Federal Reserve or OPEC+ shield market prices from the impact of what’s happening on the ground?
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