Crude Oil and an Overhyped Stat

As light sweet crude oil prices approach $100.00 per barrel, lunch table conversations could turn from housing related issues to the economics of consumer spending with $100 oil. With $100/barrel oil, will consumers finally hit their threshold for spending and begin to cut back on disposable income purchases in order to fit energy costs into the monthly budget? We won’t know what oil price will spark that turning point, but we feel that it may have already started.

With unleaded gasoline averaging more than $3.00 nationally, time will tell if the consumer will be hit hard. Recently, there has been an indication that high energy prices (as well as a blow to the housing market) is finally taking its toll on the average consumer. Retail sales were terrible – look at the table below. Target, Costco and Saks are the clear winners with positive YTD sales. However, looking at the rest of the table shows bleak and downright ugly sales. The consumer may be going to the stores, but they are spending less each time. Oil’s 55% rise in 2007 may be a contributing factor (along with a weak housing market, credit troubles, slowing economy, rising food costs, etc.). But the question remains, how have oil prices been affecting the public’s perception of the commodity?

Click on the chart to enlarge
I began writing this post to talk about the retail sales, but when I started looking into oil’s price action, I noticed a few revealing qualities in the oil charts. Oil markets have always been a quick moving market and the media never lets that obvious fact get past you. However, the media would also let you know that the volatility in the past month or two has been substantial, leading you to believe that the market’s volatility has surpassed any point in the last 12 months. Heck, when was the first time you saw the price of oil down more than $4 one day and up a similar amount the next? Not too often, if at all. So, is the price of oil really been more volatile?

Click on the chart to enlarge
I decided to look at the daily trading ranges for the price of spot light sweet crude oil over the past 12 months (see chart above). It is interesting to note that the ranges have increased substantially as the price per barrel has approached $100. Of course, you can assume that higher prices comes with wider trading ranges – and you would be correct. However, if you look at the average daily trading ranges as a percentage of the price per barrel, you might start to see the same thing I am which is opposite of what you may have been hearing from mainstream media.
The average daily trading range (which is synonymous with volatility in my book) has actually dropped off and still has not approached levels we saw earlier this year (see table).

Notice that there were three times that the daily trading ranges as a % of price were above 3%, and in January, that number was close to 4%. In fact, my ratio has seen oils volatility come down since late 2006 and early 2007. Try telling that to the media – they have a hard time buying this story because this wouldn’t create fear in the marketplace, and isn’t that what the media wants to do? They need you to watch and you’re more likely to watch if there is volatility, fear, excess and greed. This just tells a different side of the story – you can decide for yourself.

Trading Partners, LLC

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