July 22, 2008 - (Courtesy: Bespoke Investment Group) Below we highlight the rolling one-year correlation between the daily price changes (%) in oil and the S&P 500 Energy sector. As shown, from early 2004 through the middle of 2006, oil and oil stocks became more and more correlated. But after the peak in correlation in 2006, it has been steadily decreasing. Interestingly, the correlation increased during the first big run-up in oil from about $35 to $75. However, the most recent run-up from $60 to $140 has seen the correlation between oil and oil stocks decrease, as oil the commodity has left the stocks behind. For bubble theorists, this decline in correlation helps their argument because it shows that the commodity has taken on a life of its own. It will be interesting to see how this relationship does going forward.
