U.S. unemployment determines the state of the U.S. economy,
which largely determines global demand for oil.
The U.S. is the world's largest consumer of oil, and therefore
the state of the U.S. economy largely determines world oil demand.
One indication of the U.S. economy's strength is the initial
jobless claims figure (the number of people who have filed for
unemployment benefits for the first time).
Last week's jobless claims figure was more than forecast (as
determined by the average forecast of a number of economists and
experts), which resulted in a negative indicator for the U.S.
economy. This in turn negatively affected oil demand and oil
prices. Despite these complications, oil traded up slightly, as the
market speculated that the Fed would continue stimulus measures
based on weaker data.
Supply and demand ultimately determine oil prices, 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 the strength or weakness of the U.S. economy. Additionally, the
more people are employed, the more miles people drive to and from
work, which in turn fuels 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 affect the
earnings of upstream energy producers, such as Exxon Mobile (
), Chevron Corp. (
), Hess Corp. (
), and ConocoPhillips (
). Lower valuations of these companies also affect exchange-traded
), such as the Energy Select Sector SPDR (
), which is comprised of upstream energy producers in addition to
oilfield service providers and refiners.
Jobless claims remain neutral while oil prices increase
On June 6, the Department of Labor reported that initial jobless
claims for the week ending May 31 totaled 346,000 compared to the
estimate of 345,000. This was a neutral data point, as the figure
was very close to the forecast total.
Despite the neutral indicator, crude traded up on the day,
closing at $94.75 per barrel compared to the $93.75 per barrel
price recorded a day earlier. News sources noted that comments by
European Central Bank President Mario Draghi boosted markets, as
Draghi stated that the Eurozone would return to growth by the end
From a longer-term perspective, initial jobless claims spiked
during the recession but have 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 its pre-recession level, as the chart above
U.S. jobs and oil demand closely linked
Although, for several 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 affects earnings and
valuation. Conversely, a better-than-expected report on jobless
claims can cause oil prices to trade up, boosting oil companies'
Last week's close-to-forecast figure on initial jobless claims
was a neutral short-term indicator for oil prices, though oil
traded up on speculation that Europe would begin to recover this
year. 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
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