When oil-related geopolitical risk flares up, most investors take their cue from oil prices. While energy prices are vital to monitor, far fewer investors track the telling price spread between and . West Texas Intermediate or WTI is the US domestic oil price benchmark, priced at Cushing, Oklahoma, and largely reflects North American supply and demand conditions.
Brent is the global oil benchmark, priced off North Sea crude oil. Its price closely tracks the international supply and demand dynamics, and importantly, today, the seaborne oil that flows through the Persian Gulf and the Strait of Hormuz. Under normal conditions, Brent trades at a $2-$5 premium over WTI.
When that premium widens or shrinks rapidly, the market is conveying important information. In the context of the current Iranian conflict, the Brent WTI spread is therefore one of the cleanest real-time signals available about what oil producers, corporate energy users, and traders are thinking.
A widening Brent WTI spreads indicates that oil markets are pricing in a global supply shortfall. A stable or narrowing spread, even amid elevated spot prices, would be the market’s way of signaling that the disruption is expected to be temporary and contained
As we share below, the spread has been volatile. Currently, the Brent WTI spread is large at $7.00, indicating that the market suspects the conflict will continue to weigh on global oil supplies. However, the spread has been highly volatile, shifting violently from one headline to the next.
S&P 500 Lags Most Sectors
Last week, the was down less than half a percent; however, from its Tuesday peak, it was off slightly over 3%. It is about 5% lower than recent highs. As shown in the screenshots below, most sectors are outperforming the market according to our absolute and relative analyses. The blue circle in the top graphic indicates that most sectors are currently in the top-left quadrant. This indicates they are slightly overbought relative to the S&P 500 but slightly oversold based solely on their technicals.
The second graphic shows each sector’s excess performance versus the S&P 500 over the last five days and the 20 days preceding that. Not surprisingly, the transportation section is grossly lagging the market during this time. The third graphic highlights the transportation sector’s top ten holdings. The companies most dependent on oil prices (trucking, freight, and airlines) are, as we would expect, the most impacted. Moreover, these companies’ earnings are highly correlated with economic activity.
Thus, the combination of high oil prices and the growing likelihood of weaker economic activity is dragging their share prices lower. The longer this conflict wages, the more likely they are to underperform. Accordingly, while the sector may become very oversold, it may remain so until peace emerges.
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