Oil Markets Driven by Macro Economy, Not Fundamentals

Oil prices settled higher on Friday for the fourth consecutive session, after positive U.S. jobs data helped ease growing jitters about the state of the U.S. economy. Brent crude for September delivery was up 62 cents to trade at $79.78 per barrel at 16:45 hrs ET while the corresponding WTI crude contract was changing hands at $77.07/bbl, good for a 62 cents gain. The latest data by the Labor Department revealed that initial claims for state unemployment benefits fell 17,000 to a seasonally adjusted 233,000 for the week ended Aug. 3, the lowest level in 11 months. That figure came in lower than 240,000 jobless claims forecast by economists polled by Reuters. 

This comes as a welcome reversal after last week's data showed a surprise sharp jump in jobless claims, which experts now chalk up to fading impact from temporary motor vehicle plant shutdowns and Hurricane Beryl. Unadjusted claims dropped 13,589 to 203,054, with claims falling sharply in Michigan and Missouri, states with a heavy presence of motor vehicle assembly plants. Automakers typically idle assembly lines in July to retool for new models. The latest jobless claims report supports the notion that the abysmal payrolls report for July was an outsized blip due to a record number of people unable to work because of bad weather.

Related: Iran Finds New Buyers of Its Oil

The housing market also saw some welcome news on Thursday, with the average rate on the popular U.S. 30-year mortgage rate falling 26 basis points to 6.47% this week, its lowest level since May 2023.

Overall, the U.S. economy grew at a 2.8% clip in the second quarter,  double the growth pace in the first quarter.

"The talk of an imminent recession seems wide of the mark," Marc Chandler, chief market strategist at Bannockburn Global Forex, told Reuters. His sentiments are echoed by BlackRock saying the U.S. recession fears are overdone. The asset manager has argued that the July U.S. jobs report is more in-line with an economic slowdown than a recession. BlackRock notes that job creation is slowing, but averaged a robust 170,000 over the past three months; consumer spending, while cooling, remains relatively healthy and Q2 corporate earnings have so far topped expectations, with S&P 500 earnings growth projected at about 13%, above the 9% expected at the start of the season. BlackRock is the largest money manager in the world with $9.1 trillion in Assets Under Management (AUM).

The bullish jobs report is, however, bearish for oil and other financial markets in another sense: it could lead to lower interest rate cuts. Last week, traders were betting on a 70% probability of a bigger-than-usual 50-basis-point reduction by the Federal Reserve after the poor jobs report rapidly increased fears of a recession in the world's largest economy. However, the markets are now assigning a lower 58% probability of that big cut coming when Fed officials meet in September. That's probably the reason why oil markets have only issued a muted response to the bullish jobless claims report.

However, economists are warning not to read too much into the latest jobless claims report, meaning a big interest rate cut could still be in the works. To wit, the number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 6,000 to a seasonally adjusted 1.875 million, continuing an upward trend. "Investors have to be careful not to read too much into one report like they did recently with the last payroll report. If the data deteriorates quickly from here, the Fed could take more decisive action in September and cut by a half of a percent,"Jeffrey Roach, chief economist at LPL Financial, told Reuters.

With oil markets now focusing more on the state of the U.S. economies and largely ignoring supply/demand fundamentals, another presidency by Republican candidate Donald Trump might not be a bad idea, after all. On Thursday, Trump said that U.S. presidents should have a say over decisions made by the Federal Reserve, his most explicit indication that he might infringe on the central bank's independence should he regain the White House.

"I feel the president should have at least (a) say in there," the former president told reporters at his Mar-a-Lago residence in Florida. "I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman."

That said, Trump putting his thumb on the Fed's decisions might only deliver short-term gains. Economists have pointed out that such a path might lead to a repeat of the 1970s under Fed Chairman Arthur Burns who was pressured by President Richard Nixon (who appointed him) to maintain expansionary monetary policy ahead of the 1972 election despite evidence of inflationary pressures building. Consequently, U.S. inflation surged to 12% by 1974 and remained a persistent problem for a decade until Fed Chairman Paul Volcker instituted crushing interest rate increases that triggered two recessions in the early 1980s.

By Alex Kimani for Oilprice.com

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