US industrial production drops causing oil price decline
US industrial production is one indication of the health of the economy. Every month, the Federal Reserve reports figures on industrial production which can have the effect of moving both stock and commodity markets. A lower than expected increase in industrial production is a bearish indicator for the economy and can move oil prices lower. The inverse is also true where a higher than expected increase in industrial production is a positive indicator and can move oil prices higher. This is because oil demand is tied closely to economic growth and industrial activity. Lower oil prices negatively affect the valuation of oil producers such as ExxonMobil (XOM), Chevron Corp. (CVX), ConocoPhillips (COP), and Hess Corp. (HES), as well as the valuation of energy ETFs such as the Energy Select Sector SPDR (XLE).
On February 15, the Federal Reserve announced that the month-over-month change in industrial production was (0.10%), compared to consensus estimates of 0.2%. Additionally, industrial production had grown 0.4% in December and 1.4% in November, so January’s contraction appears to be a reversal of the trend. This means that US industrial production shrank while many expected it to grow, which was a negative data point. The above graph shows changes in industrial production month-over-month.
West Texas Intermediate (WTI) crude prices fell on the day from $97.31/barrel to $95.86/barrel, with the most pronounced drop at 9:15am ET when the industrial production figures were announced. Market participants worried that a decrease in economic activity would translate into a decrease in demand for crude oil, and therefore decreased prices. Lower oil prices have the effect of depressing the valuation of the stocks of upstream energy producers. The below chart shows crude oil prices plotted against XOM and XLE, and one can see that the three have largely moved in line with one another.
Therefore, many holders of energy stocks keep track of indicators related to economic health such as the industrial production figure. A worse than expected data point, such as the one that the Fed reported this month, can have the effect of significantly moving oil prices, and therefore the price of oil-related stocks such as XOM, CVX, COP, and HES, or energy-related ETFs such as XLE.
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