Why Crude Oil & Stocks Could Surge Higher

Is the stock market bull back?

Both the US S&P 500 and the Dow Jones closed in positive territory for the year, last week.

The US S&P 500, the large-cap benchmark, rose 1.4% to close last week at 2,049.52 points. The Dow Jones Industrial Average Index, the institutional money index, gained 2.2%. It closed the week at 17,602.30 points, logging its longest winning streak since early October.

Aussie shares also went in the right direction…

Following a small rally sparked by the US Federal Reserve, the ASX 200 closed 0.3% higher. The benchmark index stands at 5,166 points. The big banks had a solid week, extending their recent recovery. ANZ Banking Group [ASX:ANZ] climbed 2.5% to $26.05 per share, while Commonwealth Bank [ASX:CBA] rose 2.3% to $78.16 per share.

The US dollar sold off, sending energy and commodity stocks higher.

But, what’s next?

I’ll explain…

Identifying the correlation

If you didn’t know, the Aussie stock market tends to follow the US’ lead.

At the moment, the US Dow Jones is nearing its major technical resistance of 17,680 points. If it can close above this level on a weekly basis, the Dow Jones could re-test the May 2015 high of 18,350 points. If this happens, the Aussie stock market should surge higher.

Of course, while it’s good to remain optimistic, such a feat won’t be a walk in the park.

After jumping five weeks in a row, the Dow’s up nearly 13.5% from its recent low of 15,550 points. Experience shows the good times never last forever. So, I’d be cautious for now.

Looking forward, the crude oil price will be important. According to The Ticker Tape,

The correlation between oil and S&P 500 futures recently reached a higher-than-normal 84%, said JJ Kinahan, chief market strategist at TD Ameritrade. But that was actually down from the extreme high of 92% seen in late January and early February. Historically, Kinahan said, the correlation has been 55%.’

While asset correlations don’t last forever, the stock market’s tracking crude closely for now. And since that’s the case, you’ll probably want to know a bit more about crude.

Crude’s story talks

Reviewing the story, while central banks have aided the stock market bounce, crude oil has been the primary driver. On this note, I warned crude was looking bullish in Money Morning on 1 March. I said,

Crude looks ready to break out higher. Looking at the daily charts, should Brent close above US$37 and WTI close above US$34 per barrel, it may be game on for crude. The rally probably won’t be huge. If it happens, crude should jump to US$40–42 per barrel — a major technical resistance level.

Since writing that update, West Texas Intermediate (WTI) — the US oil price — has jumped 18.3% higher, to US$39.91 per barrel. It hit a high of US$41.20 per barrel this month. Brent crude is up 15.5%, to US$41.54 per barrel. The international benchmark price hit a high of US$43.10 per barrel this month.

That’s a decent jump. But, it’s not even half the story.

From its 13-year low, crude has surged more than 50% since mid-February. While this makes me nervous, it doesn’t mean crude can’t jump higher into April’s OPEC meeting. The National elaborates,

The main actors behind efforts to arrange an oil production “freeze” are trying to get a deal back on track for next month’s meeting, although the purpose of the gathering remains hazy.

The Qatari oil minister and current Opec president, Mohammed Al Sada, said last week that a meeting of “Opec and non-Opec producers” had been scheduled for April 17 in Doha.

His statement followed the cancellation of a similar meeting that had been scheduled for yesterday to follow up on a previous meeting between the oil ministers of Russia, Saudi Arabia, ¬Qatar and Venezuela in Doha last month.

It is not yet clear who will attend the Doha meeting, although Mr Al Sada has said that 15 Opec and non-Opec producers, accounting for about 73 per cent of global oil output, “are supporting this initiative”.

Boasting 73% of world supply, the upcoming OPEC/non-OPEC meeting is crucial for crude and stocks in the short term. But, of course, ‘freezing’ oil at January levels — near all-time highs — probably won’t make much of a difference in the medium term. In fact, considering the fundamental outlook, crude looks set to hit a fresh low later this year.

But, regardless of the bigger picture at play, you shouldn’t discount crude’s — and the stock market’s —bullish posture. Remember, the trend is your friend, and that’s still up.

Nonetheless, for the run to continue into 17 April, Brent must close above US$37.40 per barrel — February’s monthly high — on 31 March. Meanwhile, WTI must close above US$34.69 per barrel.

Of course, if those numbers don’t hold, look out below!

With this in mind, there’s a fair bit of breathing space at play. So, I like the chances of seeing a further rally. And, if the recent correlation is a good road map, this should bode well for stocks…at least in the short term.

If you want to know more on this story and the best resource stocks to buy, check out Resource Speculator here.


Jason Stevenson,

Resources Analyst

PS. By the way, if you haven’t checked out my colleague Sam Volkering’s latest small-cap report yet, do so now. He shows, with extensive proof, how some unique stocks are bucking the wider equity trend. His system — which intercepts big company news stories, anticipating them sometimes months in advance — is making some of his readers huge amounts of money. As you’ll see, one reader made a years’ pension in a single stock. Take a look here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia