Why Oil Soared Despite the Falling Dow

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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrials closed the week on a down note, falling 73 points, to finish the week down about 235 points off its record-high close of 15,658 last Friday. A combination of August-vacation sluggishness in trading, the desire to lock in profits from record share-price gains, and legitimate uncertainty about the economic future in the U.S. and abroad, likely contributed to the week's declines.

In the oil market, however, prices bucked the downward trend, with West Texas Intermediate prices soaring more than $2.50 per barrel, to close near $106. Brent crude had slightly less-dramatic gains, but finished above $108, as the spread between the two closed to just $2.25 per barrel. The gains for WTI were the first in six days.

One reason that oil and the stock market moved in different directions has to do with the differing ways in which the two markets interpreted financial news coming from China. Yesterday, Chinese export figures were strong, with gains of 5.1% last month. Today's positive news included a 13.2% gain in retail sales and a 9.7% increase in factory output. That news has certainly affected some U.S. stocks, especially Dow components Caterpillar and Alcoa , both of which have bucked the downward trend, given their exposure to economic conditions in world markets and China, in particular. Yet, while U.S. stocks, in general, haven't tracked China's economy very closely, the emerging nation's size and energy appetite make conditions there a key driver of oil price movements.

Perhaps the best indicator of how different China and the U.S. are right now comes from comparing oil and natural gas prices. Natural gas fell to a five-month low of $3.23 per mmBTU today, as cool weather reduced electricity-generation demand, and that weakness might explain part of why Dow energy giants Chevron and ExxonMobil both fell 0.5% today despite the gains in oil prices. Moreover, because natural gas is much harder to transport overseas than oil, the fact that oil is moving in the opposite direction just shows how, despite the global economy, local economic conditions still matter -- and they still get reflected in different markets.

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The article Why Oil Soared Despite the Falling Dow originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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