US economic strength is a major factor in oil demand and therefore oil prices
Oil prices are ultimately determined by supply and demand forces, and oil consumption is one factor in the demand equation. U.S. employment figures affect U.S. 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 U.S. employment figures as one indicator of the demand for oil, and consequently oil prices which affects 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.
Reported initial jobless claims were close to expectations: neutral indicator
On July 18, the Department of Labor reported that initial jobless claims for the week ended July 13 were 334,000 as compared to the estimate of 345,000, which was a positive data point as the figure was significantly lower than the forecast figure. This is fundamentally positive for crude as it implies a stronger US economy, and therefore stronger oil demand. Crude traded up on the day, closing at $108.04/barrel compared to $106.48/barrel a day earlier.
Over the past few years, jobless claims have been trending downward, but still not at pre-recession levels
From a longer-term perspective, initial jobless claims spiked during the recession, but have gradually trended downward. Note, however, that though initial jobless claims have largely returned to pre-recession levels, the U.S. unemployment rate is still significantly above where it was prior to the recession.
The relationship between jobs and oil demand
The below chart demonstrates the relationship between the number of U.S. jobs and U.S. 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 U.S. 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. Conversely, a better than expected report on jobless claims can cause oil prices to trade up, boosting oil companies’ revenues.
The last reported figure on initial jobless claims was significantly less than expectations, which was a positive short-term catalyst for oil prices. Oil prices were also supported by large inventory draws (for more on oil inventories see “Why another large inventory draw boosts oil prices, a short-term positive”). 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.
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