- The US is the world’s largest consumer of oil, and therefore, the state of the US economy is an important determinant of world oil demand. One indication of the strength of the US economy are initial jobless claims (the number of people who have filed for unemployment benefits for the first time).
- Last week’s jobless claims were less than forecast (as determined by the average forecast of a number of economists and experts), which was a bullish indicator for the US economy and therefore positive for oil demand and oil prices.
Oil prices are ultimately determined by supply and demand forces, and oil consumption is one factor in the demand equation. US employment figures affect US oil consumption as employment is one measure of how strong or weak the domestic economy is. Additionally, the more people who are employed, the more miles are driven to and from work, which drives a portion of demand for oil as some of the commodity is used to make transportation fuels. Therefore, many market participants track US employment figures as one indicator of the demand for oil, and consequently oil prices which affect the earnings of upstream energy producers such as Exxon Mobile (XOM), Chevron Corp. (CVX), Hess Corp. (HES), and ConocoPhillips (COP). Lower valuations of these companies also affect ETFs such as the Energy Select Sector SPDR (XLE) which is comprised of a number of upstream energy producers in addition to oilfield service providers and refiners.
On March 7, the Department of Labor reported that initial jobless claims for the week ended March 2 were 340,000 as compared to the estimate of 355,000, which was a positive data point. Additionally, jobless claims for this past week were lower than that of the prior week’s figure of 344,000. Initial jobless claims spiked during the recession, but have gradually trended downwards since then as shown in the top graph.
Note however, that though initial jobless claims have largely returned to pre-recession levels, the US unemployment rate is still significantly above where it was prior to the recession. The below graph shows the US unemployment rate.
The below chart demonstrates the relationship between the number of US jobs and US oil demand on a percentage change basis from January 2001. Though for various reasons (such as seasonality) the demand for oil fluctuates much more than the jobs figure, the trends of US jobs and oil demand appear to be closely linked.
Therefore, market participants watch unemployment figures and jobless claims as one indicator of domestic oil demand. A worse than expected report on jobless claims can cause oil prices to trade down. Given lower oil prices, upstream energy companies realize lower revenues which ultimately affect earnings and valuation.
Last week’s smaller than initial figure on initial jobless claims was a positive short-term indicator for oil prices. Additionally, it seems that over the medium-to-long term both initial jobless claims and the broader unemployment rate appear to be trending downwards and both these trends are also positive for oil demand and oil prices.