8/27/2010
By Conley Turner, Research Analyst

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The price of crude oil remains volatile as market participants digest a slew of data about the overall health of the economy. The latest report on Gross Domestic Product, which is the most encompassing read of the economy's output, conveyed that growth in the U.S. is slowing.  From the April to June period, the economy grew at an annualized rate of 1.6 percent and falls short of the initial estimate of 2.4 percent.  The result trails the 3.7 percent pace recorded in the first quarter and highlights the extent of the current slowdown. Investors are also mulling over Federal Reserve Chairman Ben Bernanke's speech on how the Fed will respond in the face of the weakening economy.

This news follows a number of similar reports released over the past few weeks.  Earlier in the week, the government reported that new claims for unemployment benefits actually declined in the previous week.  The US Department of Labor reported that first-time claims for unemployment benefits fell to 473,000 in the week ended August 7.   This comes after a spike above 500,000 in the previous report. The consensus expectation was for a decline to 490,000.  The report interrupted consecutive weeks of rising numbers and sparked some optimism that the economy may not fall back into recession.  Crude oil prices rose as a result. The fact of the matter though is that this is but one data point against the backdrop of a particularly difficult economic environment. The pace of growth is slowing with no near term sustainable turnaround being evident.

The elevated rate of unemployment remains a crucial impediment to any recovery.   Until that situation is resolved it is unlikely any progress made will be accomplished. Up to a few months ago the concept of a jobless recovery was being bandied about. However, the present environment does not validate that argument and has given way to fears of a double dip recession. At this juncture, it appears that the current rate of unemployment is likely to be an enduring fixture on the economic landscape and this will ultimately have an impact on prices.

 The situation in Europe is also turning out to be an important factor in the daily price movements of oil.  Although the crisis there appeared to have faded from the headlines, it is once again coming to the forefront as the austerity measures in Greece are believed to be severely impacting that country's economy.  Fears are mounting about the adverse impact that it will have on the  broader European economy which by extension will affect the need for energy. Investors have fled the Euro in recent months to the relative safe haven of the U.S. dollar which has also pressured oil price.  The price of oil is inversely related to the value of the dollar.

 All said, at this juncture, there is no certainty as to whether or not any upside move in oil prices is going to be sustainable. Nonetheless, after falling over 10 percent from the $82 achieved about a month ago, the commodity is trading at the low end of a trading range. As such, some investors are currently looking at the current level as a trading opportunity.   A significant amount of price volatility in oil can be expected until clarity in broader economic picture is achieved.

Conley Turner
Wall Street Strategies