Oil and stocks moving closer together

oil and stock
Danil Melekhin | Getty Images

Oil and stocks are moving together in a close relationship not seen in years. That could be a good thing for investors.

The 30-day running correlation between West Texas Intermediate futures and the S&P 500 is above 0.6, a level not seen since early 2013. A correlation of 1 would indicate perfect harmony between the two, a zero would indicate no correlation, while a reading of -1.0 would mean they were moving in exactly opposite directions.

The close relationship fell apart in mid-January of this year when oil prices dropped precipitously. Stocks followed, but not as dramatically.

Since the beginning of February, oil and stocks have moved together 83 percent of the time, up from 74 percent in January and 64 percent in December. On average, they've moved together 60 percent of the time since April 2013, so that 83 percent is pretty impressive.

There's a few possible explanations. It's unlikely this is a random correlation, but it could fall apart soon, either if oil prices plunge again or the stock market does.

It could be that historically low crude prices mean more for the market than when oil coasts along in the $80-$90 a barrel range. If the price of crude is still moving stocks, investors could benefit from decreased oil production and the stabilizing of the price of oil.

In the past week, the rally in stocks has been matched by optimism for oil, and the correlation jumped again. Spot prices for Brent crude, a global benchmark, have risen 16 percent in the past week and climbed above $30 a barrel Wednesday.

The rise on Wednesday came after it was reported that Iran would support Saudi Arabia's proposal to freeze oil production at January levels. Tension has been rising as Saudi Arabia cut public spending amid the global oil glut. Iran has been increasing production in recent weeks after sanctions against the country were lifted and it's been able to export more crude.

Genius move by Russia, Saudi Arabia?
Genius move by Russia, Saudi Arabia?