Oil to trend higher even if equity markets start to fall – Morgan Stanley

Oil usually rises and falls with the overall stock market because the prices of both are seen as proxies for economic activity. But that relationship has broken down recently. In the opinion of Andrew Sheets, Chief Cross-Asset Strategist at Morgan Stanley, oil may continue to outperform on a cross-asset basis.

Are oil and stock prices now disconnected?

“As stock markets have fallen, oil prices have held up. We think that oil will continue to outperform on a cross-asset basis. If you're in an environment where economic activity is strong right now, but also might slow in coming years, equity and credit markets can start to weaken even as energy prices hold up. I think that's a pretty decent description of the current backdrop.”

“Oil prices could rise further if the war in Ukraine escalates, a scenario that would likely push prices down in other asset classes. But if geopolitical risk declines, there could be better growth, more economic confidence, and more energy demand, meaning oil might not fall much relative to forward expectations. That positive skew of outcomes should be supportive of oil.” 

“We forecast higher prices for oil, and for oil-linked currencies like the Norwegian krone.”