Watching the Shanghai Composite’s relationship with Oil, not Coal

• Posted by Greg Harmon
• on March 19th, 2015

In life, you never know who is going to get along with who. You see a group of people and try to determine which ones pair up into couples. Inevitably you end up getting some of them right but some are so far from what you think that it shocks you. This can happen in the markets as well. You hear about the inverse relationship between Stocks and Treasuries, and take it as a given until they start to move together.

One of those weird relationships has been going on between Crude oil and the Shanghai Composite over the last 3 years. Why would these two markets have any correlation? China uses mostly coal for power, not Oil. Yet there is a correlation.

The chart above shows the the Shanghai Composite, inverted, as the red line, and West Texas Intermediate Crude Oil as the area behind it. There has been an extremely tight negative correlation between the price of Crude Oil and the Shanghai Composite. They seem to move perfectly opposite. if you had to pick which one is leading then I would put my bet on the Shanghai Composite with the drop in mid 2013 leading, and the current leg lower accelerating earlier.

Whether China moving higher is leading Oil lower or it is coincident there is one thing to take away from this pair. As China is breaking out to the upside again the move lower in Crude Oil is likely to continue lower, a long as this pair relationship holds.

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