See-Sawing Oil Price Reflects Conflicting Economic Factors

The price of a barrel of crude topped $80 for the first time in 2009 yesterday as a generally positive US earnings season lead investors to believe that corporate, and eventually consumer, demand for the commodity would be on the rise. Today, some of the gains have been given back based on higher than expected supply, indicating that businesses and consumers and not using as much oil as economists expected.

So, which is it? Is the US economy demanding oil, or is it still mired in confusion regarding what the future holds? In my opinion, oil prices are likely impacted by both of those factors, as well as myriad others. Though it is not always viewed this way by economists, for our purposes we can view crude as a both a leading and lagging indicator whose volatility may be a good sign for the economy.

It is well known that businesses are usually able to determine a business cycle trough before consumers. (Whether they anticipate the preceeding downturn is another question entirely of course). Therefore increased corporate demand for oil and other commodities is a good sign. However, consumer demand has not yet picked up, at least based on the recent numbers. This makes sense; the jobless rate is still high, oil consuming activities such as vacationing are down, and there is still a great degree of job-related uncertainty for everyone from landscapers to Wall St. traders. Therefore, oil demand is not likely to really pick up until average people, in addition to the C-suite, believe that the worst of the current downturn is over.


It is this type of environment that has the potential to produce widely swinging commodity prices rather than steady rises or declines. Add to these factors others, such as technical trading, the decline in the dollar, uncertainty over what currency oil will be tied to in the future, and increasing global demand, and the daily, weekly, and even monthly charts can be very confusing. However, though it may sound strange, the upward march of oil prices, with some short-term see-sawing, is probably a good sign for the medium term outlook of the US economy.


The Yahoo Finance article can be found here