The long-standing correlation between oil prices and stock prices appears to have broken down, according to recent changes in the financial markets. This divergence is predicted to persist for the foreseeable future.

These two asset groups have historically traded together, frequently mirroring shifts in demand around the world.

But Capital Economics researchers think we are about to enter a phase where they will go in different directions.

The patterns in oil and stocks have differed significantly over the last few years. The price of Brent Crude has lately fallen to around $70 per barrel, its lowest point in over three years; yet, there have only been minor drops in the stock market, especially in the United States.

The impact of supply-side forces on the oil market is one of the main causes of the disparity. In contrast to stocks, which are more impacted by investor sentiment and economic fundamentals, peculiar supply problems have had a significant impact on oil prices.

The decision by OPEC+ to prolong production curbs, along with a premium for geopolitical risk, has led to a skewed supply dynamic in the oil market.

Notwithstanding fluctuations in the state of the global economy, these supply-side variables—rather than shifts in demand—have maintained pressure on oil prices.

However, rather distinct causes have driven the equities markets, especially in the United States. The stock market has experienced a surge of confidence due to the growing enthusiasm for artificial intelligence (AI) breakthroughs, particularly in tech-heavy indexes.

This AI-driven confidence helped drive equity markets to record highs until the middle of 2024, as investors bet on the revolutionary potential of AI technology.

Another factor of this disparity arises from the disparate achievements of China and the United States within the global economy. China, a key contributor to the world's oil consumption, has experienced a slowdown in economic development and a decline in imports of crude oil year over year.

The contraction has put significant pressure on oil prices, compounding the decline in worldwide demand. Global equities markets, on the other hand, are more strongly impacted by the performance of the United States and other advanced nations, where demand is still mostly constant, so this hasn't had a big effect there.

The future prospects for oil prices are very bleak. Oil prices are probably going to be under pressure for a while since OPEC+ is probably going to keep strict control over production and China's demand is probably going to stay muted.

It is not anticipated that the further decline in oil prices would affect the equities markets, though.

The difference in performance between these two asset classes, which has already been noticeable in recent years, is probably going to be the same as long as advanced economies' success and the ongoing technology revolution support stocks.

In comparison, the prognosis for stocks is better. Although the U.S. economic outlook has raised some concerns, Capital Economics anticipates a revival of excitement over AI, which might lead to additional advances in the stock market.

(Sources: investing.com, reuters.com)