Surprising correlations between Oil, US Manufacturing and US Consumer Spending since 2003

I’m currently reading (and loving) Daniel Yergin’s compelling “The Prize: the Epic Quest for Oil, Money and Power”.  It’s fascinating to think that the same geopolitical topics and oil regions with which the world is collectively struggling today are the same topics and regions that have been disputed since the days when Standard Oil, Royal Dutch Shell and the Anglo-Persian Oil Company were collectively battling for control.  With all of the political rhetoric recently circulating about geopolitical oil market manipulation and ineffective energy policy, and Yergin’s book as recent contextual support, I thought I’d perform an analysis on how closely the international Baker Hughes deployed rig count has correlated with oil spikes.

To provide additional dimensions, I collected ISM manufacturing data, and Gallup consumer spending data, to assess influence of oil on these economic indicators.

It’s common energy industry knowledge that rising commodity prices provide the financial incentive to deploy rigs, and that inevitably, as prices spike, supply starts to outpace demand, resulting in price drops.  This is the oil/gas price cycle that has recurred for a century.  I wanted see this visually depicted, and see if any anomalies arose.

In adding consumer spending, and ISM manufacturing data, I expected a strong negative correlation between the price of oil and consumer demand.  I expected that periods of high oil prices would result in subsequent month periods of immediate reduction in consumer spending.

The findings:

Despite consistently rising oil prices starting in mid 2009, consumer spending has remained somewhat stable, while manufacturing sentiment has modestly risen. The rig count substantially tracked the Brent Crude oil price with high correlation.

Correlations:

Conclusions:

The analysis revealed some very interesting findings.  You can see visually that although Brent Crude has risen to near 2008 levels, consumer spending has not tracked oil as it did in 2008, or dropped considerably.  In fact, Consumer Spending was positively, not negatively correlated with the price of oil.  The rig count very strongly tracked the price of oil.

There is no clear takeaway here.  Oil demand remains steady in western nations, and is accelerating in the Asia Pacific region.  This trend has emerged since 2008, and is likely to provide support for high oil prices for some time to come.  The deployed rig count, therefore should presumably remain near the current rate, to the benefit of drillers and oil and well services companies.  US natural gas prices are a wildcard, as the forecast low prices for the foreseeable future present opportunity for the US manufacturing and transportation sectors.

Sources:

Rig Count

Baker Hughes International: http://gis.bakerhughesdirect.com/RigCounts/

Consumer Spending

http://www.gallup.com/poll/151151/consumer-spending-monthly.aspx

Note: Gallup tracks daily the average dollar amount Americans report spending or charging on a daily basis, not counting the purchase of a home, motor vehicle, or normal household bills. Respondents are asked to reflect on the day prior to being surveyed. Monthly results are based on telephone interviews with approximately 15,000 national adults; Margin of error is ±1 percentage point.

Institute for Supply Management PMI

http://www.ism.ws/ISMReport/content.cfm?ItemNumber=10752

Brent Crude

Energy Information Administration: http://205.254.135.7/dnav/pet/pet_pri_spt_s1_m.htm