Schork Oil Outlook: Gasoline vs Consumer Confidence

Gasoline Prices: Consumer Whatfidence?

Yesterday, the Conference Board released the latest consumer confidence index. We have stated several times that confidence would likely to lower than the 70.4 seen in February and the 65.0 expected by analysts. Indeed yesterday’s number came to 63.4, its first drop in six months.

In today’s issue of The Schork Report, we chart consumer confidence against average retail gasoline prices. Recently it seems like higher gasoline prices (up 30.31% since July 2010) have had no impact on consumer confidence (up 24.31% over the same timestep).

Yet this is likely due to the absolute level of prices, and there is a historic precedent. When retail prices crossed above the $3.00 barrier in April 2007, consumer confidence actually rose to a high of 111.90 in July 2007, a three month lag. Yet prices rose to $4.146 by June 2008 while confidence fell through the floor to 51.0.

Returning to recent months, prices crossed 3.000 again in December 2010, and confidence seems to have peaked in February, a two month lag. In quantitative terms, this can be represented by a positive, though weak short term correlation of 0.0933 - implying that the two securities have a slightly linked correlation.

But our long term correlation is a much stronger at negative -0.321. This implies that the drop in confidence can not be written off as winter weather related demand destruction (in fact the 2009/10 winter season, which saw severe snowstorms, saw confidence spike in March). We can not even place confidence on the unemployment rate or initial jobless claims, both of which have been falling steadily recently.

The bottom line is that gasoline prices significantly impact consumer confidence. And with prices hanging above $3.500, there is little doubt that that impact will be negative.


Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.