Correlation Between Energy And Equity Prices Strengthens

A recovery rally is underway for a second day, following the largest single day point gain for the major U.S. equity indices Monday. Crude oil prices have gained five dollars off their low trades, and refined products have rallied 12 cents or more since last week’s lows. The correlation between energy and equity prices has strengthened over the past couple of weeks as the markets return to a period of risk-on or risk-off trading.

The volatility is not gone despite the bounce however, with large overnight price swings as the potential for coordinated central bank action to combat the economic impact of the coronavirus was anticipated, but seems to have largely come up empty based on the early headlines.

It looks like the $49 that acted as support for WTI in early February will now be the first layer of resistance to test the staying power of the recovery rally. ULSD has a similar cluster of support/resistance around the $1.58 range that’s already held off one overnight rally attempt and looks to be a pivotal level near term.

One potential side effect of recent drop in fuel prices and interest rates? Storage for crude and distillates may be back in high demand as forward curves have flipped from backwardation to contango during the 2020 market meltdown, particularly with the cost of capital reductions associated with those plays. This demand for storage could push spring basis values higher than normal as those with room to store extra will need a higher price to unwind that trade.

Click here to download a PDF of today's TACenergy Market Talk.