What’s Behind Oil’s Rally? It’s the Economy, Stupid

Oil prices have posted an impressive bull market over the last seven weeks.

Since December, the spot price of WTI crude has risen from $85 per barrel to $96 per barrel, approaching a high it hasn’t exceeded since September.

At times it can be difficult to attribute market moves to a single cause. But not this time. Oil’s rise has been fueled by healthy economic activity in the United States and greater optimism about that continuing in the future.

On December 20, GDP growth checked in at 3.1%, compared to an expected 2.8%.

The next day, durable goods orders nearly quadrupled growth expectations.

But that’s not all. Take a look at what’s happened just this month…

  • Over the New Year’s break, the dodging of the Fiscal Cliff added optimism to everyone’s economic outlook, and boosted all markets. And on January 18, Congress voted to extend the debt ceiling, thereby removing another short-term threat to the economy.
  • Around the same time, the Energy Information Administration (EIA) released data showing oil inventories decreased to 360.3 million in the seven days ended January 11, as gasoline demand jumped 3.9% to 8.32 million barrels per day.
  • And on January 24, initial jobless claims fell to a five-year low of 330,000 – the best number reported since the financial crisis.

Of course, that’s a partial list. And there were undoubtedly some economic releases that brought bad news, but the trend is clear: The economy is back on track and oil is surging as a result.

Want more proof?

Look at the way the markets are moving. While the United States has been posting good economic numbers, the results from Europe aren’t as strong. As a result, West Texas Intermediate (the price for U.S. oil) has outpaced Brent (the price for Europe) over this period.

This has narrowed the gap between the two brands of crude from $20 per barrel to around $16, which suggests the rising demand from strong growth is largely an American phenomenon.

Looking forward, we can expect oil prices to act as a leading indicator for the U.S. economy. If you look at the relationship between oil prices and GDP growth, you can see that high prices and growth go hand in hand.

Oil Prices Lead GDP Growth

In conclusion, there are two things to be learned from this oil surge:

  1.  If you’re trading energy prices, the biggest motivator is economic growth.
  2. And right now, there’s room for optimism in the U.S. economy and oil prices.

And “the chase” continues,

Matthew Weinschenk

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Oil prices have posted an impressive bull market over the last seven weeks. Since December, the spot price of WTI crude has risen from $85 per barrel to $96 per barrel, approaching a high it hasn’t exceeded since September. At times it can be difficult to attribute market moves to a single cause. But not...

Matthew Weinschenk