Mortgage Rates and Oil: An Interesting Duo

Oil is all over the news, and Nations Lending employees and their clients are certainly happy to be paying less at the pump. Prices have dropped to $50 a barrel from around $115 a barrel in June. But does the price movement of oil impact mortgage rates?

The steep decline in global oil prices is threatening the current global political and economic order. Interestingly it is boosting activity in the United States while seriously weakening several of its big oil-exporting rivals, including Russia, Iran and Venezuela. Saudi Arabia, the world’s biggest petroleum exporter, says it will not cut production to strengthen oil markets even if countries outside OPEC do so. The Saudis certainly have the assets to be riding out the market’s worst slump in years. And in the areas where Nations Lending helps borrowers we are seeing some benefits.

The classic economic interpretation of a drop in oil prices is that it’s a boost to Gross Domestic Product (GDP) which would drive rates higher. This is true enough, but it is also a dampener to inflation, and this lowers rates. The reality is that oil prices and interest rates have some correlation between their movements, but are not correlated exclusively. Many factors affect the direction of both interest rates and oil prices and sometimes those factors are related, sometimes they affect each other, and sometimes there’s no rhyme or reason to what happens.

The price of oil can be influenced by currency fluctuations, political unrest, supply and demand changes, and so on. Factors such as hurricanes, wars, increased efficiency of new cars, lowered OPEC output, and changes in domestic oil production all can have uncorrelated effects on oil prices. Just when you thought oil prices should go up or down opposite of interest rates, they do something entirely different.

Economists are carefully watching consumer’s behavior with the latest price drop. How long does it takes for consumers to spend their “oil price decline” windfall? How fast do companies shed jobs in the oil sector? How badly do companies avoid expansion because of the slowdown implied in the lower oil price? How quickly do lenders have collection problems with energy loans? Currently many economists believe that the near term effect of lower oil prices on rates is bullish (lower rates) but the long term effect is bearish (higher rates). Enjoy it while you can!