The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 44

Why the Interest in Oil?

Will oil prices keep plummeting? Will interest rates fall? For the answer, keep an eye on the relationship between interest rates and oil. They've been quite tight-knit up until now. This chart is structurally a lot like the snake (Chart 43). It chronicles the amazing oil price-interest rate relationship since the beginning of the OPEC-induced oil crisis. As shown in other charts (see Charts 40 and 45), what happens with any major interest rate, such as the 20-year Treasuries used here, tends to mirror (and be a good proxy for) trends in other debt securities. In this chart, interest rates are measured on the left-hand vertical axis, while oil prices are shown on the right-hand vertical axis.

From 1973 to 1986, major oil price moves and fluctuations in Treasury notes matched each other in direction within 12 months. The trends diverged only briefly in 1983–1984. Oil prices and interest rates remained rather flat between 1975 and 1978. Then they both started up. Interest rates led the way. But oil peaked out first, in 1980, soon followed by Treasury rates in 1981. From there the path was basically downhill, with only that one interest rate hiccup of 1983–1984. Interestingly, the relationship would have warned you in 1983–1984 that either oil prices were going back up, which they didn't, or else interest rates were going to turn around and head lower, which they did. After that, as interest rates fell steeply in 1984–1985, their decline warned you ...