Could Crude Oil be Signaling Economic Weakness?

During the week of 03/13/23 to 03/17/23 Crude Oil made a new bear market low.  This move   implies additional weakness for  Crude Oil.  It could also be a bearish signal for the economy and stocks.

Crude Oil is the essential commodity for the global economy.  Generally rising Oil prices correspond with a growing economy.  Falling Oil prices generally correspond with economic contractions. 

What happened during the 2008 Crude Oil bear market could give us clues as to what may happen to Crude Oil and the global stock market in 2023.

The weekly Crude Oil  Continuous  Futures chart (CL2!), and the S&P 500 (SPX) chart courtesy of Trading View shows their relationship 2007-2008. 

The SPX made its then all-time high in October 2007.  Crude Oil didn’t make its all-time high until July 2008.  In late 2007 and early 2008 problems from the sub prime mortgage market began to appear.  This caused the SPX to drop, but not dramatically because there was still some economic growth. Crude Oil continued to rise until mid-2008.

Then something different happened during the second week of July 2008.  The SPX and Crude Oil both declined however for the next several weeks Crude Oil kept dropping while the SPX had a small rally.  Crude Oil’s new relative weakness to the SPX was a clue that perhaps an economic contraction was underway. 

In mid – August 2008 the SPX small rally ended.  Then from September to October both the SPX and Crude Oil experienced the most dynamic parts their bear markets.

The weekly chart from 2020 to 2023 updates the relationship of Crude Oil and the SPX.

After the SPX 2022 all-time high in January, Crude Oil continued rising into March, a much shorter divergent time period than 2007-2008.

In the 2022- 2023 time cycle the potential bearish signals come from seasonal patterns.  Stocks are seasonally bearish from August to October, then are bullish into at least April.   Crude Oil is bearish from August to December then bullish to May. Sometimes there’s a brief bearish period from May to June, then bullish into August. 

Note that in December 2022 Crude Oil made a new bear market low while the SPX retraced  its rally from the October bottom.  Crude Oil bottoming in December with a higher SPX bottom is not a bearish signal for the economy.  Seasonally this is what you would expect from Crude Oil and the SPX.  What’s happened to Crude Oil after December 2022 is bearish.

The Crude Oil  rally from January to March has been pathetic, and now its broken below the December bottom!   When a market moves counter to its seasonal patterns it usually means a powerful trend could be underway – in this case down.   The break below the Crude Oil December 2022 bottom implies it could continue falling for several weeks.

The drop in Crude Oil prices could mean supply has increased or demand has decreased.   With the recent failure of two major U.S. banks its more likely Oil demand has decreased.

Crude Oil, global stocks and the economy could soon be declining sharply.