Does OIl Now Have A Price Ceiling In the $98-$100 Area?

The chart above shows that since the beginning of 2013, oil has hit the $98-$100 price area four times.  Each time, it has retreated.  The question is, why?

There are several potential reasons:

1.) Overall, world growth is slow.  The strongest country -- China -- is in the midst of a slowdown (albeit from 10% growth to 7%).  All other economies are experiencing similar slowdowns.  Some parts of the globe (the EU) are in the middle of a prolonged recession.

2.) Commodities are losing their investment luster: the drop in gold was perhaps the icing on the cake, but all other commodities are struggling to make price gains.  With inflation low and the dollar stronger, commodities just aren't needed right now.  Hence an exit from this asset class by hedge funds:

Money managers are the most bearish on commodities in more than four years as a majority expected a weaker Chinese economy for the first time in 14 months, a Bank of America Corp. survey showed. 

A net 29 percent of the fund managers surveyed were underweight the asset class in May as their positions “collapsed” to the lowest level since December 2008. One in four now consider a “hard landing” in China as the biggest risk to their investments. The bank surveyed professional investors who together oversee $517 billion.

3.) The development of the US shale oil market has sent "shockwaves" through the oil markets:

North America will provide 40 percent of new supplies to 2018 through the development of light, tight oil and oil sands, while the contribution from the Organization of Petroleum Exporting Countries will slip to 30 percent, according to the International Energy Agency. The IEA trimmed global fuel demand estimates for the next four years, and predicted that consumption in emerging economies may overtake developed nations this year. 

“The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15,” the Paris-based adviser to 28 oil-consuming nations said in its medium-term market report today.

The development of U.S. shale resources, enabling the nation’s highest level of energy independence in two decades, is creating a “chain reaction” in the global transportation, processing and storage of oil that may escalate as other countries try to replicate the American oil boom, according to the IEA. Crude futures for settlement in 2018 are trading at a discount to current prices, signaling expectations for increasing supplies and constrained demand.

Deficit Declining

From the CBO

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, CBO estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP. 

From the CBPP

Health care cost growth has slowed substantially, as the latest projections from the Congressional Budget Office (CBO) make clear  Since late 2010, CBO has reduced its projection of cumulative Medicare and Medicaid spending over the 2011-2020 period by $900 billion (or nearly 10 percent over that period). 

. . . Aaannd gas prices roar back

- by New Deal democrat

One thing I hope I'm clear about when I discuss the Oil choke collar is that I claim no special knowledge as to what will happen with energy prices in any kind of short term timeframe. My impression is that large speculators can and do push gas prices up and down over the short term roughly between $3 and $4 a gallon, and constantly relieve the suckers of their betting money. Once you get past a few months, the economy reacts to the relatively high or low price by accelerating or decelerating. In this way the price of gas acts like a governor on the speed of the economy. I do believe that increased efficiency, alternate sources of energy, and new discoveries of petroleum will act over the longer term to lower prices, and that may have already started this year, but we will see.

In any event, after retreating just below $3.50 a gallon by the end of April, in just the last 20 days it has zoomed back up over 5% to about $3.70. Here's the relevant graph from Gasbuddy:



Following my back of the envelope formula, take this increase, divide it by 10 (or 16 if you want to be conservative), and add 0.1%, and you should be very close to the non-seasonally adjusted inflation rate for the month. This gives us a +0.5% or +0.6% increase in prices for May - as of now. Since there is no significant seasonal adjustment this month, that will also be the adjusted inflation rate.

This will also have a significant effect on real wages and sales.

US Employment: Employer Behavior

Once again, I'm going to turn to the new employment graph started by the Macroblog website, this time focusing on employer behavior.  And for that, I'll be looking at JOLTS data.  This is a relatively new data set -- in only goes back to the beginning of the 2000s.  This means we don't have the ability to do any historical comparisons.  However, it does give us an objective reading on what employers are doing in the jobs market, which in turn gives us an idea to what they're thinking.

Let's start with a graph of layoffs:

Total layoffs are now at levels below the last expansion.  This tells us that employers aren't adding to the unemployment rate at a high rate.

Here's the definition used by the BLS for this data: a job opening is [a] specific position of employment to be filled at an establishment; conditions include the following: there is work available for that position, the job could start within 30 days, and the employer is actively recruiting for the position.  Put another way, if an employer is looking to add to his workforce, he will advertise a job opening to fill. 

This number -- like most employment numbers -- cratered during the recession.  But, it's been slowly bouncing back to levels seen during the last expansion.  However, note that during 2012 the data series appeared to stall between the 3.6 and 3.8 million level.  This was also during the period when employment growth seemed to stall at moderate levels.

Let's turn now to total hires:

 
Like the openings data, this number appeared to stall during the 2012 period.  However, the level at which the data series stalled was a the lowest point of the previous expansion.  This tells as that the rate of hiring is still at very low levels.

These two data points are interesting.  While the job openings number has bounced back, the job hires numbers have not.  So while employers want to increase their labor force by posting an opening, they are very unwilling to make the final commitment and hire a person.