Oil and Gas

Investors worry falling oil prices will take stock prices down with them. So far, they're not

Key Points
  • Oil prices and stock prices have decoupled twice in the last decade.
  • They may be doing it again, as oil is in a bear market while the stock market keeps hitting new highs.
Oil prices rebound on weaker US dollar
Oil prices rebound on weaker US dollar

When oil prices take dramatic dips, investors worry crude could derail the market. But some are saying this time is different. Like Chris Martin and Gwyneth Paltrow, oil and stocks can 'consciously uncouple.'

Over the last decade we've seen decoupling twice but for different reasons, and that's the key. In 2008 when oil was at $145, stocks were sinking.

It took a while but eventually oil came down with stocks because demand had been affected enough to weaken the price.

"The 2008 oil price slide was a demand driven event, you could say that the stock market crash pulled oil down," said John Kilduff of Again Capital.

In 2014 it happened again. Crude started another steep slide from $107, but at the same time stocks managed to move steadily higher.

The economic circumstances this time were different. A supply driven story rattled crude prices, the shale revolution, the unlocking of resources in the United States. Demand may not have been growing fast enough to absorb the excess supply but it was still relatively robust.

Now it appears to be happening again. There is a bear market, or decline of 20 percent, for oil year to date, while the stock market continues to close in on new highs daily.

"This time around it's supply driven, and low oil prices are only a problem for oil companies and one-trick-pony oil-producing countries," Kilduff said. "If the oil price slide were an early indicator of a slowing global economy, then stocks would follow suit but that does not appear to be the case."

Lower for longer may not be a phenomenon but just the new normal. It's good for consumers, it's good for companies that use crude as an input — it's not great for big oil, but most companies have managed to bring costs down to carry on. Lower prices may throw a punch to GDP, but you could argue that would keep the Fed off balance and deter more tightening this year.

"When I bought my 40-inch flat screen TV in 2008 it was around $2,000, today you can get a bigger one for less than $250. Better and cheaper technology have brought down the price of TVs, same thing has happened in the crude market," said Any Lipow, president of Lipow Oil.

Another thing to consider is the weight that energy bears on the market. In 2008 energy companies were about 15 percent of the S&P, and now they're about 6 percent, so earnings bumps could still be problematic but less so than before. And low prices help more than hurt.

"The primary cost of almost any production is energy. In steel production, in aluminum production, in shipping, in assembly; energy is Starbucks' second most important input. So if energy prices are falling, it may be detrimental to energy companies but it's materially beneficial to everyone and everything else," said Dennis Gartman, editor of the Gartman Letter.

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