Jobless Claims in Line, but Oil Rises on ECB Comments
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 ( XOM ), Chevron Corp. ( CVX ), Hess Corp. ( HES ), and ConocoPhillips ( COP ). Lower valuations of these companies also affect exchange-traded funds ( ETFs ), such as the Energy Select Sector SPDR ( XLE ), 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 of 2013.
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 indicates.
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' revenues.
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 prices.