Oil markets driven by macroeconomics, not fundamentals

Oil prices rose for a fourth straight session on Friday after positive U.S. jobs data helped ease growing jitters about the health of the U.S. economy. Brent crude for delivery in September rose 62 cents to trade at $79.78 a barrel at 4:45 p.m. ET, while the corresponding WTI crude contract changed hands at $77.07 a barrel, good for a gain of 62 cents. The the last dates The Labor Department revealed that initial claims for state jobless benefits fell by a seasonally adjusted 17,000 to a seasonally adjusted 233,000 for the week ended Aug. 3, the lowest level in 11 months. That figure was below the 240,000 jobless claims expected by economists polled by Reuters.

This comes as a welcome reversal after last week’s data showed a surprise rise in jobless claims, which experts now attribute to the easing of the impact of temporary car plant closures and Hurricane Beryl. Unadjusted claims fell 13,589 to 203,054, with claims falling sharply in Michigan and Missouri, states with a strong presence of auto assembly plants. Automakers typically busy assembly lines in July to retool new models. The latest jobless claims report supports the idea that the abysmal payrolls report for July was a huge blip due to a record number of people unable to work due to inclement weather.

Related: Iran Finds New Buyers for Its Oil

The real estate market saw them too welcome news on Thursday, the average U.S. 30-year popular mortgage rate fell 26 basis points to 6.47 percent this week, the lowest level since May 2023.

Overall, the US economy grew 2.8% in the second quarter, double the pace of growth in the first quarter.

“Talk of an impending recession seems to be misunderstood,Marc Chandler, chief market strategist at Bannockburn Global Forex, told Reuters. His sentiments are echoed by BlackRock, which said the U.S. recession fears are exaggerated. The asset manager argued that July’s US jobs report was more consistent with an economic slowdown than a recession. BlackRock notes job creation is slowing but has averaged a robust 170,000 over the past three months; Consumer spending, while cooling, remains relatively healthy and Q2 corporate earnings have so far beaten expectations, with S&P 500 Earnings growth was projected at around 13%, up from the 9% expected at the start of the season. BlackRock is the world’s largest money manager, with $9.1 trillion in assets under management (AUM).

The upbeat jobs report, however, is bearish for oil and other financial markets in another sense: It could lead to smaller interest rate cuts. Last week, traders bet on a 70 percent chance of a larger-than-usual 50 basis point rate cut by the Federal Reserve after a weak jobs report quickly raised recession fears in the largest economy of the world. However, markets are now assigning a lower 58% chance of that big cut coming when Fed officials meet in September. This is probably why oil markets only issued a muted response to the upbeat jobless claims report.

However, economists caution against reading too much into the latest jobless claims report, which means a big interest rate cut could still be in the works. In other words, the number of people receiving benefits after the initial week of aid, a proxy for employment, rose by 6,000 to a seasonally adjusted 1.875 million, continuing an upward trend. “Investors need to be careful not to read too much into one report, as they did recently with the last earnings report. If the data deteriorates rapidly from here, the Fed could take more decisive action in September and cut by half a percentage point,Jeffrey Roach, chief economist at LPL Financial, told Reuters.

With oil markets now focusing more on the state of the US economies and largely ignoring supply/demand fundamentalsanother Republican Donald Trump presidency might not be such a bad idea after all. On Thursday, Trump said U.S. presidents should have a say in decisions made by the Federal Reserve, his most explicit indication yet that he could undermine the central bank’s independence if he regains the White House.

“I feel the president should at least say (a) there,“, the former president told reporters at his Mar-a-Lago residence in Florida.”I think in my case, I’ve made a lot of money, I’ve been very successful, and I think I have a better instinct than in a lot of cases, people who would be in the Federal Reserve or the president.“

That said, Trump putting his thumb on the Fed’s decisions could only provide short-term gains. Economists pointed out that such a path could 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 before the 1972 election, despite evidence of increasing inflationary pressures. As a result, US inflation rose to 12% by 1974 and remained a persistent problem for a decade until Fed Chairman Paul Volcker instituted crushing interest rate hikes that triggered two recessions in the early 1980s.

By Alex Kimani for Oilprice.com

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