April 30 (Bloomberg) – Crude oil rose, capping a third monthly gain, on signs that the global economy and fuel demand will recover this year… Crude-oil supplies rose 4.05 million barrels to 374.7 million barrels last week, according to an Energy Department report released yesterday. The gain left inventories at the highest level since 1990 and 15 percent above the five-year average for the period.
The crude oil market does a nice job of showing where things stand at present. Prices are rising on the expectation that economic growth will rebound while current fundamentals deteriorate. As Goldman Sachs put it this week, ‘The divergence between oil market fundamentals and the leading edge of macro economic indicators pointing towards ‘green shoots’ continued to widen…”.
Belowwe show the ratio between gasoline futures and heating oil futures.
In general crude oil prices tend to be influenced by gasoline futures into May and then heating oil futures through into year end. Strength in crude oil futures prices is, by and large, a reflection of the rising trend for the gasoline/heating oil ratio. The twist is that this ratio tends to peak during the month of May- often right around the Memorial Day weekend which marks the official start of the summer driving season.
Belowwe show the ratio between crude oil futures and the CRB Index along with the ratio between crude oil and natural gas futures prices.
The fulcrum for our thesis rests with a downward resolution for the crude oil/CRB Index ratio. This should be confirmed by a declining ratio for crude oil relative to natural gas. As we have argued in the past major bottoms for crude oil prices tend to occur when the oil/gas ratio declines below 7:1- which it did briefly last December.
Our point is that crude oil prices are being supported by relative strength for gasoline and this trend tends to run through into May. Our equity markets view has been based on the idea that there will be a two month rally for stocks from March into May followed by a three month period of weakness into August. If we are correct then the gasoline/heating oil ratio has to peak and turn lower concurrent with weakness in the crude oil/CRB Index ratio and the crude oil/natural gas ratio. If pressed we would argue that it could still be a few weeks before the anticipated trends start to show up.
Equity/Bond Markets
Below we show a chart comparison between, from bottom to top, the ratio of the Amex Oil Index (XOI) to the S&P 500 Index (SPX), the ratio between the Canadian stock market (S&P/TSX Comp.) to the U.S. stock market (S&P 500 Index), and the ratio between Wells Fargo (WFC) and Canada’s Royal Bank (RY).
The argument is that the oil began to rally relative to the broad market in October of last year two months ahead of the start of relative strength by the Canadian stock market. In other words as the Canada/U.S. ratio began to rise the ratio between a U.S. bank (WFC) and a Canadian bank (RY) began to fall.
If the markets are working on a two month lag then the down turn in the XOI/SPX ratio in March would indicate weakness in the Canada/U.S. ratio some time around May. To date the ratio has started to weaken somewhat although we have yet to see the kind of relative strength by WFC that would seal the deal.
Below we return to a chart comparison that we have not shown in these page for quite some time- for obvious reasons. The comparison is based on the share price of Anheuser Busch which was taken over by InBev last year.
The argument was that the trend for BUD follows or goes with the ratio between the U.S. Dollar Index (DXY) and copper futures. We argued through 2007 and into 2008 that BUD would do better once copper prices started to weaken and the dollar kicked higher. Our point today is that this argument was not specific to Anheuser Busch; it was more of a general comment with regard to the consumer defensive sector. At present the DXY/copper ratio is trending lower putting downward pressure on the consumer stocks. The argument has not changed- a better dollar and weaker copper prices would do wonders for the share prices of the large cap consumer defensive names.
Quickly… below we show a chart of the ratio between Exxon Mobil (XOM) and Boston Scientific (BSX). Given that XOM- the world’s largest company by market cap- was a bit weaker yesterday following the worst profit drop since 2002 we thought we run the chart-based argument once again. Over time the markets make major swings from energy to health care and back to energy. When the ratio has peaked in the past the trend has favored the health care theme for at least the next three years. If history were to repeat the process would continue until the XOM/BSX ratio had declined back below 2:1.
