Why worse jobless claims figures are a fundamental negative for oil demand

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. Additionally, the more people who are employed, the more miles are driven to and from work, which fuels a portion of demand for oil since some of the commodity is used 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. This 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 is comprised of upstream energy producers in addition to oilfield service providers and refiners.

Reported initial jobless claims were close to expectations: a neutral indicator

On July 12, the Department of Labor reported that initial jobless claims for the week ended July 6 were 360,000 compared to the estimate of 340,000. This was a negative data point, as the recorded figure was significantly higher than the forecast. This is fundamentally negative for crude, as it implies a weaker U.S. economy and therefore weaker oil demand. However, crude traded up on the day, closing at $105.95/barrel compared to $104.91/barrel a day earlier. Speculation that oil inventories could drop further supported oil prices (for more on oil inventories, see Must-know: Oil prices rise to new highs on supportive inventory report).

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 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 chart below demonstrates the relationship between the number of U.S. jobs and U.S. oil demand on a percentage change basis from January 2001. Although, 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.

So 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.

Initial jobless claims figures are negative for oil prices, but they appear to be trending downwards

The last reported figure on initial jobless claims was significantly more than expected, which was a negative short-term catalyst for oil prices. However, oil prices were supported by speculation around further inventory draws (for more on oil inventories, see Oil prices rise to new highs on supportive inventory report). 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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