Positive U.S. manufacturing sector data boosts oil prices

The ISM Manufacturing Purchasing Managers Index reflects sentiment about the manufacturing sector of the economy

The Institute for Supply Management (ISM) compiles a monthly report that includes a key figure called the Purchasing Managers Index (PMI). The index comprises several sub-indicators that are determined through surveys of purchasing managers across the United States. The sub-indicators are:

  1. Production level (weighted 25%)
  2. New orders from customers (weighted 30%)
  3. Supplier delivery times (weighted 15%)
  4. Inventories (weighted 10%)
  5. Employment level (weighted 20%)

Purchasing managers can respond whether the indicators are performing better or worse. A PMI reading of higher than 50 generally indicates that the manufacturing industry is expanding, and a reading of less than 50 generally indicates that the manufacturing industry is contracting. An expanding manufacturing sector is generally a positive signal for the broader economy.

2013.07.31 - ISM PMIEnlarge Graph

July’s reported ISM PMI was 55.4, a strong positive surprise

For the month of July, the ISM Manufacturing PMI reported was 55.4, which was above the survey of 52.0. This was a positive figure, as it implies that the U.S. manufacturing sector is performing more strongly than expected.

The strong PMI figure was a bullish signal for the U.S. economy and oil demand: Oil rose on the day

The positive PMI figure, along with a strong initial jobless claims figure (see Lower jobless claims: Positive for U.S. economy and oil demand) helped to push up oil prices to close at $107.89 per barrel on the day, compared to the closing price of $105.03 per barrel the day prior. This is because the reported PMI indicated a healthy manufacturing sector, which also implies robustness in the U.S. economy, and therefore a positive signal for oil demand. Oil producers such as Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP), and Occidental Petroleum (OXY) benefit from higher oil prices, as do energy ETFs such as the Energy Select SPDR ETF (XLE).