Oil futures trading has suffered from a rather turbulent start to the New Year. Prices have fluctuated up and down as mixed economic news and readings from around the world have rolled in. Weak December jobs data is causing concern among traders and economists. That generally equates to dropping oil prices, and thus oil futures. On the other hand, rising imports to China suggest that demand for energy will remain high in the future. This has helped bolster oil prices against any major declines.
Oil Futures Trading Posting Declines to Start the New Year
Often, the New Year is meet with a sense of optimism among traders. Following strong gains in many markets through the holiday season, however, many stock market indices and commodities have posted declines.
To start the New Year, oil prices trended lower due to increased output from oil producing countries, such as the United States, and rising oil inventories. With demand levelling off and supply increasing, oil inventories have generally been rising, suggesting that countries had more than enough oil on hand to meet their needs.
The decline in oil prices may have also been due in part to over exuberance through the close of the year. It is possible that markets are simply readjusting. Other economic indicators, however, suggest that the global economy is not as strong as previously thought. If so, demand for oil might be set to decline, which will result in lower oil prices. Oil futures have been largely trending negative due to this outlook.
So what is causing skepticism about the strength of the global economy? Private employers in the United States hired the fewest workers in three years this past December. The job market actually posted the weakest gains since January 2011. While many economists shrugged the reports off, markets were caught off guard. Besides oil, the U.S. dollar declined, as well as numerous indices across the world.
Oil Futures Trading Closes Week With Gain
On Friday (January 10th), oil futures actually posted a gain to close out the week. To be clear, oil futures still suffered a decline through the full week due to concerns over weak demand, marking the second straight weekly decline. On Friday, however, oil futures gained 1.3% on rising imports to China.
Crude oil futures with a February expiration date posted a 1.2% increase, adding $1.06 to settle at $92.72 to close out the week. This followed a 67 cent decline on Thursday. Despite the strong decline, however, oil futures recorded yet another negative week. Still, oil futures could be poised for a rebound in the coming weeks if positive news continues to roll in.
While demand from the United States remains weak, demand from China continues to climb. Imports to China, the world’s second largest oil importer, is actually rising. This is helping to offset slacking demand from other markets.
Oil Prices and the US Dollar
Further, it is important to remember that the U.S. dollar has huge impacts on oil prices, because oil is priced in dollars. If the dollar weakens, oil prices tend to climb, especially over the long run and after short term losses due to market data is accounted for. So if the U.S. economy weakens, or losses momentum, the Fed will likely back off its plans to taper its quantitative easing programs. This will keep the dollar from gaining, and could even cause further declines in the value of the dollar, which in turn would push oil prices higher.
With so many different trends impact oil futures trading it is difficult to predict which direction prices will go in. It should come as no surprise then that oil markets have been turbulent to start the new year. Of course, where there is turbulence and volatility, there is a potential to produce substantial profits.