What Macroeconomic Indicators Are Suggesting for Crude Oil



Bond market doesn’t have a green light for crude oil yet

The spread between the ten-year Treasury note, or T-note, and the two-year T-note was 1.03% on April 11, 2016—near December 2007 levels. From February 11–April 11, 2016, the spread consolidated between 0.98%–1.1%.

In the last five years, WTI (West Texas Intermediate) crude oil prices have a correlation of 63.7% with the ten-year and two-year constant maturity T-notes spread.

The spread between the ten-year and two-year constant maturity T-notes is an important indicator of the US economy’s future growth outlook. When the spread narrows, the longer-term bond’s return decreases compared to the shorter-term bond. This implies that the longer-term outlook is bleak compared to the short-term outlook. The above chart shows the spread of the T-notes.

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Lower growth corresponds to lower demand for crude in the future. This reflects the dynamics of the crude oil supply and demand equation. So, it can be an important indicator for exploration and production companies like Northern Oil & Gas (NOG), Denbury Resources (DNR), and Kosmos Energy (KOS). These companies operate with a high production mix of crude oil.

Slowdown fear looms over US economy

The US trade deficit expanded to $47.06 billion in February. The trade deficit is an important constituent of the GDP. A higher trade deficit may lead to lower GDP growth than estimated. As the US (SPY) (IVV) is a leading importer of crude oil, slower economic growth can impact crude oil prices.


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