Don't fall into the equity trap for oil

Lately, oil has been closely tracking the equity markets - most recently, it closed down for a second straight session (after a high of 54.66, just short of our band at 55) on the back of a poor day in equities. We believe this makes no sense as we think that oil needs to respond more directly to aggregate demand (as we've discussed before) instead of using the equities market as a proxy for aggregate demand. 

Tracking equities as a real time demand proxy may make sense in normal times when demand is dictated on the margin and capital structures and credit markets are operating within a familiar band. However, these days the macro factors will continue to drive the long-term trends (see the minimal reaction to OPEC shifts, collapse in Baltic Dry, dismal export numbers globally). To that end, every false equity driven "recovery" is bound to get smacked back down until the fundamentals are fixed.

Eventually, oil is going to decouple from equities and when it does it's going to break long faster than equities. We'll cover the specific macro factors that need to be addressed and consequently will serve as important indicators for an oil recovery in another post.