8/20/2010
By Conley Turner, Research Analyst

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The price of crude oil is trending lower as market participants ponder the impact that recent economic data is likely to have on future demand.  Trading in the commodity is proving to be very volatile with the price level now the lowest since the early part of July.

In a report issued by the U.S. Department of Labor, claims for unemployment benefits increased at a faster pace than was expected.  The government reported that in the week ending August 14, the advance figure for seasonally adjusted initial claims was 500,000.  This represented an increase of 12,000 from the 488,000 recorded in the previous week. Additionally, the Federal Reserve of Philadelphia indicated that manufacturing activity in the mid-Atlantic region actually declined in the month of August.  This comes after two month in which activity was already slowing.

Coupled with similar government releases over the past few weeks, a rather gloomy picture as to the state of the broader economy is beginning to emerge.   While the official jobless rate of 9.5% is bad in and of itself, it still does not tell the whole story.  That statistic does not take into account those individuals who are unable to find full time jobs or who have just stopped looking for work altogether.  If those people were included, then the jobless number would hover closer to 17.5%.   That figure translates in the over 50 million U.S. citizens in some degree of economic distress.  This high rate of unemployment or underemployment suggests that there simply is not sufficient economic activity to engage this pool of labor.

The impact of the news on world stock markets was immediate and robust.  Bourses from Asia to across Europe retreated in dramatic fashion. Since there was no economic or corporate news coming out of the U.S. to offset this malaise, the downward momentum in US indexes continued on Friday. 

In recent months, oil traders and investors have been taking their cue from the broader equity market. This was borne out of the belief that stock market is barometer of the overall health of the economy.  As such, the trade in the commodity has very much paralleled the movement of the U.S stock indexes.  This fact was underscored when oil traders all but ignored a recent report from the American Petroleum Institute.  The organization reported that fuel consumption in the U.S. actually rose by 3.8% in month of July when compared to prior year levels.  According to the organization, this increase was largely due to diesel consumption and not a reflection of broader economic activity.  While at other times, the market would have reacted favorably to this release, this time around the response was muted.

Concerns about the future demand for oil have been gaining ground in recent months particularly in the wake of the debt crisis in Greece.  When that situation surfaced, it cast a shadow about Europe's short term economic prospects.  Should economic activity on the continent be curtailed, then an adverse and meaningful impact on oil prices would sure to result.  Similarly, some recent news out of China pointed to signs of a slowdown in that country's economy.

Those headlines have now faded and the economic prowess of the U.S. is now in question. A slowdown in the U.S. or even the remote possibility of double dip recession will surely have a negative impact on economic growth around the world.  In such as event, oil demand will fall and this is what the current price decline is conveying. 

In the end, as long as the economic picture remains nebulous, the trade in oil will remain volatile.   At this point, it is likely that the commodity will be range bound between $70 and $80 per barrel.

Conley Turner
Wall Street Strategies