Why oil traded down despite better-than-expected jobless figures

Market Realist

U.S. 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. Plus, the more people are employed, the more miles they drive to and from work, which fuels a portion of demand for oil because refiners use some of the commodity to make transportation fuels. So, 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 (exchange-traded funds), such as the Energy Select Sector SPDR (XLE), which comprises upstream energy producers in addition to oilfield service providers and refiners.

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Reported initial jobless claims were lower than expectations: A positive indicator

On August 8, the Department of Labor reported that initial jobless claims for the week ended August 3 were 333,000, as compared to the estimate of 335,000, which was a slightly positive data point because the figure was a bit less than the forecast figure. This is fundamentally positive for crude, as it implies a stronger U.S. economy and therefore stronger oil demand. However, crude traded down on the day, closing at $103.40 per barrel compared to $104.37 per barrel a day earlier, as markets surmised that the Fed might be close to ending stimulus measures.

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 they’ve gradually trended downward. Note, however, that although 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.

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The relationship between jobs and oil demand

The chart below shows the relationship between the number of U.S. jobs and U.S. oil demand on a percentage change basis from January 2001. But for various reasons (such as seasonality), the demand for oil fluctuates much more than the jobs figure, and the trends of U.S. jobs and oil demand appear to be closely linked.

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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 affects earnings and valuation. Conversely, a better-than-expected report on jobless claims can cause oil prices to trade up, boosting oil companies’ revenues.

Outlook

The last reported figure on initial jobless claims was below expectations, which was a positive short-term catalyst for oil prices. Over the medium-to-long term, both initial jobless claims and the broader unemployment rate appear to be trending downwards. Both these trends are also positive for oil demand and oil prices.

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