A Toxic Combination: Sentiment And Oil Prices

By John Richardson

Yesterday we suggested that demographic challenges in the West, the strain on resources resulting from rising consumption in emerging markets and rising inflation should heavily feature in discussions at this week’s World Economic Forum in Davos.

Chemical industry leaders who could be attending include Mohamed Al-Mady, CEO of SABIC, Andrew Liveris, CEO of Dow Chemical and BASF CEO Juergen Hambrecht, according to my colleague Nigel Davis at ICIS news.

My fellow blogger Paul Hodges is highly sceptical over whether one very well-recognised issue will be the subject of the right kind of debate at the great annual economics talking shop: Inflation, the main cause of which is the rise in the cost of crude oil.

The problem that the great and good at Davos, and everyone else, face is predicting the timing of any crude-related inflation bust as it will be sentiment-drive, added Paul.

“Supply/demand balances have been telling us for 18 months that there’s too much supply, so trying to decide when sentiment and fundamentals might reconnect is an art, not a science,” he continued.

“It might even be starting to happen now, in fact, as Saudi Arabia has made a fairly clear statement that it doesn’t want prices over $100/bbl.

 

Set to keep the wild, drunken student party going?

Ben_Bernanke.jpgSource of picture: benarnke.net

 

“Put this alongside China continuing to tighten, and by March, people might be starting to believe oil prices won’t move up much further.

“If this became a general belief, as in July/August 2008, or Q1 1980, then procurement people will start the process of re-balancing their inventories, etc etc.

“But on the other hand, if Bernanke has another go at driving up asset prices and announces QE3, we could be off to the races again….”

Credit Suisse supports the view that there is a big overheating risk right now.

This evident from its newly-launched index that measures growth dynamics in the chemicals, energy, paper and packaging and transportation and shipping industries.

Click here to download a copy – CreditSuisseCSBasicMaterialsIndex.pdf

The index uses North American ethylene production and (naphtha) margin data and demand data for polyethylene (PE), polypropylene (PP) and polyvinyl chloride (PVC), although the chemicals weighting in the index is low. This is again according to analysis by my colleague, Nigel Davis.

“The December estimate is consistent with the observation from recent real economic data that last summer’s global slowdown scare is now turning into something approaching a global speed-up scare,” writes the bank in its first index report.

, , , , , , , , , , , ,

Leave a Reply