Today's Trends: Gauging Oil Prices Using Global GDP

Since 1970, the average annual price of oil has improved 22 times and has experienced 17 declines through the year 2009. Last year’s 36% drop in world-wide oil prices marked its worst year-over-year decline since 1986. Incidentally, 2009 was the first time that global gross domestic product (GDP) has seen negative territory in the last forty years, as tracked by the International Monetary Fund (IMF). As illustrated in the chart above, the good news for 2010 is that oil prices rebounded following their three previous worst declines. With oil prices holding at $70 plus and just one half the year remaining, a predicted bounce for average oil prices seems a foregone conclusion.

No correlation between changes in global GDP and changes in average oil prices exists (i.e. correlation is a negative .08 between years 1970 to 2009). However, patterns of oil price sensitivity to economic conditions are quite apparent during periods of strength or weakness.

Specifically, years where global GDP fell below 2% corresponded to oil price declines during every single occurrence. The average oil price decline was 19% over the four years when global GDP was less than 2% per annum. Similarly, the five years of strong economic growth (i.e. global GDP exceeded 5%) were marked by oil price improvements that averaged 12% gains. These patterns indicate to us that signs of shrinking and swelling demand for oil are most obvious during the more extreme points on the economic cycle.


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