One general trend for oil prices has been: bad news for American industry and the dollar leads to investor uncertainty which leads to a flight to safety in commodities such as gold and oil. Investors lose faith in equities, dropping their price, and find it in oil, pushing up its price. So good news for America must lead to a fall in oil prices, right?
Well, no. The price per barrel of crude jumped over 3.38% Friday on US Payroll data which showed fewer job cuts than analysts expected. Bloomberg reports that payrolls shrank by 20,000 jobs, less than a third of the 75,000 srhink expected by analysts, with the jobless rate falling to 5% instead of 5.1%. The American economy is doing well yet the price of oil still increases? Increases by $3.80 in fact, the biggest jump in a month. What gives?
To understand the shift, one must consider the most basic relationship in economics: Supply and Demand.
When demand is high and supply is low, prices increase because buyers are willing to pay more to ensure they receive the goods. When demand is low but supply is high, the price is lowered because sellers try to attract more buyers. A supermarket charges lots for limited edition DVD’s but slashes prices on unbought copies of last year’s hits. The graph above, courtesy of Wikipedia, has supply on the x-axis, price on the y-axis and is the foundation for modern economics.
Applying the model to oil prices, there’s a shortage of supply as OPEC countries refuse to increase production and shocks such as strikes in Scotland and attacks on pipelines in Nigeria damage existing stocks. Compounding the low supply, demand is getting ever higher as China and emerging markets hunger for fuel to drive their economies.
Looking at the payroll data, more American jobs means more Americans driving cars, spending money and increasing demand. Thus, increased oil prices.
This is at odds with the initial trends mentioned, when investors feared American stocks would suffer and demand would fall due to the real estate and subprime bust, they swamped the commodities lifeboat. Whether Friday’s 3% gain was due to high demand from emerging markets, investors trying to buy oil at a cheap price, good results from oil companies or other root causes is too early to judge. Oil prices have seemingly become a catch 22, when America is doing well they go up and when America isn’t doing so well they go up-damned if you do, damned if you don’t.
Is there relief in sight? Not really, as one of the commentors mentioned, $200 per barrel seems an easy leap, and nothing in the market suggets a severe correction of prices. Supply is down, demand is up and the average joe is damned.
