U.S Labor report showing decline in unemployment

On Friday, February 4th, the Bureau of Labor Statistics published the U.S. employment report for the month of January 2011.

According to the report, the U.S. unemployment rate fell by 0.4 percent point during December, from 9.4% to 9.0%. This 0.4% decline is the same as it was during December 2010.

The number of unemployed has dropped by 600 thousand people to 13.9 million. Further, the non-farm payroll employment has risen by only 36,000, compare to a rise of 103,000 during December.

During January, the number of part time workers declined by nearly half a million to reach 8.4 million employed. During December there was no decline compare to November in part time workers.

Furthermore, the average hourly earnings for non-farm private employees increased by 0.4%.

Let’s breakdown how this recent news could affect the commodities markets in particular the demand for crude oil:

Crude oil market

Some consider that the news related to the U.S. employment situation caused the energy markets to adversely react, because the decline in unemployment didn’t match the expectations and thus causing crude oil price to fall yesterday.  The thing is that causation of daily price changes, in many cases, is hard to peg, let alone crude oil price change. Sometimes it’s very straight forward, e.g. the recent rise in oil prices due to the Egyptian turmoil, while other times, its more of a hunch then anything else. It gets a little better, however, as you try to figure the long term effects.

That being said, let’s speculate what could be the long term effects of this news on crude oil market:

On the one hand, crude oil is considered an investment for dire times and many consider it a safe heaven as the uncertainty level in major economies, such as the U.S. economy, rise. Thus, as the U.S. economic condition improves, the demand for crude oil as an alternative investment declines, along with the upward pressures in crude oil price.

This effect, however, is considered marginal as most investors consider other commodities such as gold a more reliable investment than crude oil.

Note that despite the slow down in the U.S. economy crude oil price returned to a similar price level as it was back in the beginning of 2008.

On the other hand, there should be a strong effect from the demand side: as the U.S. economy continues to progress, the demand for energy – e.g. crude oil and natural gas should rise and consequentially there should be pressures for crude oil price to rise.

In this scenario the biggest demand rise (beside private use) for crude oil in the U.S will probably come from the manufacturing sector, and this sector, in this Labor report showed a rise of 49,000 employees.

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