Volatile oil prices and a strong economy – Is crude establishing a bottom ?

February 6, 2015

Weekly Statistics:

Today

Week Ago Year Ago
06- Feb-15 30-Jan-15

07-Feb-14

S&P TSX

15,083.92

14,673.48

13,786.50

S&P 500

2,055.47

1,994.99

 1,797.02

DJIA

17,824.29

17,164.950

 15,794.08

OIL

$52.00

$47.70

 $90.79

USD vs CAD

0.79837

0.7897

0.9064

Gold

$1,235.00 $1,283.80

 $1,267.10

Crude oil prices registered their largest two week gains in 17 years in during a volatile week. An additional factor that has impacted oil price volatility has been the volatility in the U$ over the past week. Brent oil prices rallied around 20% in the last six sessions and the gains could be attributed to the falling oil rig counts across the world and violence in Libya. Libya is a major oil producers in North Africa and any major violence is a catalyst for oil prices. According to oil services firm Baker Hughes, in the month of January, the number of oil drilling rigs worldwide and in the US fell by 261 and 199 respectively. The number of US rigs actively exploring or developing oil or natural gas fell to 1456, lowest since the week of March 2010. The picture clearly depicts the effects of falling oil prices on oil producers in the US. While this reduces the exploration of new oil properties based on changing margins it does not necessarily impact existing production that much which apparent from much higher than expected inventories earlier in the week.

http://www.wsj.com/articles/oil-holds-on-to-bulk-of-recent-gains-1423031216

The inventory buildup over the past several years or perhaps even decade will take a long time to deplete and in the medium term oil prices are most likely will test lower lows before establishing a base.

Meanwhile, Canada and the US surprised the economists with strong job gains. Canada added 35,400 jobs in January, taking down the unemployment by one-tenth of a percent to 6.6%. The recently announced layoffs of 17,600 and 350 at Target and Tim Horton’s have not been included in the above numbers. Despite a major correction in oil prices, Alberta is still the leader when it comes to job creation. The province added around 14,000 jobs in January, still maintaining its position as the fastest growing province. But with an $8 Billion hole in its economy because of declining oil prices, it’s unlikely that Alberta can maintain its economic status at current oil price levels. While US added 257,000 jobs in January, better than analysts forecast of 237,000, the unemployment figure rose to 5.7% from 5.6%. The rise in unemployment is due to more people participating in the labor market now, which shows  that the population is becoming more confident about the growth of US economy.

Source- Bloomberg, The Wall Street Journal, Globe Investor Gold, CBC, Financial Post

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