"Stocks and oil rising together" is not unusual! It's just that AI has accelerated its occurrence.

Ask AI · Why does Citibank see a trading opportunity with stocks and oil rising together?

Oil prices surge, why hasn’t the stock market continued to decline as in the past?

According to the Wind Trading Desk, on May 7th, Citibank’s Global Macro Strategy team released the latest research report interpreting this perplexing market phenomenon, stating: This is not abnormal; AI has changed the rhythm.

This round of oil price shock started counting from March 6th

Analysts set the starting point of this oil price shock as March 6, 2026.

The criteria are clear: Brent crude oil futures have increased by more than 40% over three months, and the average cumulative increase within the following 100 trading days remains positive — this is the definition of a “sustained oil price shock.”

Looking back at history, every time such a sustained rise in oil prices occurs, cross-asset markets go through a fixed transmission logic: rising oil prices → rising interest rates → tightening financial conditions → pressure on the stock market.

Data shows that during historical sustained oil price shocks, the U.S. stock market usually declines continuously for about the first 50 days before entering a consolidation phase.

This time is different: stocks fall quickly, rebound even faster

The historical pattern is that the stock market declines for about 50 days before bottoming out, but this time is clearly different.

Oil prices continue to rise, while the U.S. stock market, after a sharp decline, rebounds at a rate far exceeding historical averages. The report points out:

The speed of bottoming out this time is faster than before, due to AI optimism.

Specifically, hyperscalers (large-scale tech companies) are leading the S&P 500 higher. The market’s reaction to tech earnings also confirms this — as long as increased AI capital expenditure can generate higher revenue, investors are willing to buy in.

Therefore, even if oil prices rebound again, the S&P 500 can continue to rise. The AI theme is strong enough to support tech stocks leading the rally, even with high oil prices.

History tells us: after sustained high oil prices, the correlation between stocks and oil reverses

This is the core finding of the report.

The analysts analyzed cross-asset correlation data during all periods of “sustained oil price shocks” in history and drew a key conclusion:

In the early stages of an oil price shock, stocks and oil are negatively correlated (oil up, stocks down); but as the shock persists, this negative correlation gradually diminishes and may even turn slightly positive (stocks and oil rise together).

The logic behind this is not complicated: the greatest damage from oil shocks occurs in the initial phase — rapid interest rate hikes, sudden tightening of financial conditions, and stocks forced to digest the impact. Once this “digestion period” passes, the market will gradually “see through” the oil prices, and risk assets will be repriced.

Data also shows that during prolonged high oil price phases:

• The correlation between global stocks and U.S. Treasury yields shifts from negative to positive (European, Japanese, and Chinese markets follow suit)

• The positive correlation between U.S. Treasury yields and oil prices becomes more apparent

• The correlation between the U.S. Treasury yield curve (5-year to 30-year spread) and oil prices also shifts from negative to positive — meaning the curve moves from a bearish flattening to normalization

Market pricing deviates, and Citibank finds trading opportunities

The analysts compared the “expected correlations” under historical regularities with the current market implied correlations and found significant pricing deviations.

There are three main deviations:

1. Underestimation of stock-oil correlation The current market implied 6-month stock-oil correlation is -10%, meaning the market still bets on “oil up, stocks down.” But analysts believe that historical patterns show this negative correlation will fade or even turn positive, indicating the market is undervaluing this shift.

2. Underestimation of the correlation between the U.S. Treasury curve (5s30s) and oil prices The market currently implies a negative correlation, but historical patterns suggest this correlation will turn positive as the shock persists.

3. Overestimation of the correlation between high-yield bonds (HYG) and interest rates The bank’s macro quant team points out that in more severe stagflation scenarios, credit spreads are often the first risk assets to “break.” The market is already pricing in a negative correlation between HYG and oil, which is relatively fair.

Betting on “stocks and oil rising together”

Based on the above judgments, Citibank has established a new trading position:

Buy a dual digital option expiring on August 17, 2026: S&P 500 above 106.25% (i.e., 7,833.29 points) and crude oil futures CLU6 above 110% (i.e., $91.19/barrel), with a premium of 7.5% of nominal principal, a nominal of $2 million, and a maximum loss of $150k.

Reference prices: S&P 500 spot at 7,372.50 points, CLU6 crude futures at $82.90/barrel (pricing time: 14:43 London time, May 7, 2026).

The logic of this trade is straightforward: if the stock-oil correlation, as per historical regularities, shifts from negative to positive, then the probability of “stocks and oil rising together” is underestimated by the market, making the dual digital option relatively cheap.

The bank also clarifies that they prefer to express this theme as “S&P 500 rising + oil prices rising,” rather than directly trading the correlation between the curve and oil — because they have higher confidence in the upside of U.S. stocks and less certainty about the steepening of the U.S. yield curve.

It’s worth noting, however, that the report explicitly warns of the main risk: “The primary risk of this trade is the persistent negative correlation between oil prices and the S&P 500.”

Hormuz Strait: Structural support for high oil prices

The fundamental logic for “long-term high oil prices” lies in the Strait of Hormuz. Even if negotiations make progress, the risk of oil prices rising remains:

• If the strait remains closed, global oil inventories will continue to decline, causing a convex shock to oil prices

• Even if the strait gradually reopens, it will take time for inventories to recover to normal levels, and supply will remain tight

• Therefore, “even if an agreement is reached, the risk of long-term high oil prices still exists”

This is also the premise of the entire analytical framework: oil prices will not fall quickly, and the historical regularities of cross-asset correlations remain relevant.