By John Richardson
CHEMICALS and polymer demand looks even less likely to be supported by "buying forward" following yesterday's decision by the International Energy Agency (IEA) to release 60m barrels of crude into the market.
Here is a bit of context first before we look at the implications of the IEA decision, which, along the way, will help explain why it was taken.
From the fourth quarter of last year until around February 2011, chemicals and plastics end-users built raw-material inventory in anticipation that oil prices would keep-on rising. No purchasing manager who cared about his or her job was willing to bet against the consensus that crude would go higher.
But as we've discussed before on the blog, building stocks in this way is always a risky proposition because of lack of visibility down all the production chains.
It is never clear at what stage demand destruction will begin, and how serious the loss of demand is going to be, as there is a lack of regularly updated and reliable information on how more-expensive crude is affecting retail sales.
We have been warning for a long time that the underlying macroeconomic fundamentals are a lot weaker than during the last big crude bull-run - which ended in September 2008. The global economic crisis of late 2008 has left behind "strong headwinds" detailed by Fed Chairman Ben Bernanke earlier this week.
Warning signs should therefore have been flashing red when US gasoline prices rose above their previous pre-crisis peak in March this year.
The impact of rising crude on emerging markets was also evident in early 2011 as inflation rates climbed.
Criticism is easy, though, when you are commentator rather than a participator. If all your competitors are buying forward and your managers are placing you under pressure to follow the trend, it is very hard to just say no.
A large European polypropylene (PP) buyer told ICIS news last week: "I am not buying a lot, just one or two trucks at a time. I kept a high stock level when prices were going up, so now I am using that up. Why would I buy now when I know prices will be lower in July?"
This hand-to-mouth buying pattern, which has also been the case in Asia since the end of the Chinese New Year (CNY) in late February, was a response to the already-existing uncertainty over the direction of crude and economic growth.
The IEA announcement should, perhaps, have been predicted because of the damage being caused by expensive oil.
But the release of the strategic stockpile seems to have made the outlook for crude even-more murky because:
1.) It could annoy OPEC into cutting quotas in order to fund higher social costs. The costs have risen as a result of the Arab Spring
2.) Can OPEC collectively, though, wield that much influence? Saudi Arabia is the only player who probably really matters within OPEC as it is the world's biggest swing producer. Saudi Arabia unilaterally decided to raise output earlier this month after OPEC failed to agree-on an increase in overall quotas. The release of the IEA stock-pile might be just a temporary measure until extra Saudi production calms the market, IEA Executive Director Nubuo Tanaka seems to have hinted in the Wall Street Journal article we linked-to in bullet-point one
3.) The IEA announcement was the reason given in many press reports for yesterday's steep fall in crude-oil prices. August Brent was, for instance, down by 6.1% at $107.26. But there were reportedly lots of other factors behind the slide in oil, including WEAKER GROWTH IN CHINA AND EUROPE, THE GREEK CRISIS AND THE POLITICAL IMPASSE OVER RAISING THE US BUDGET DEFICIT
4.) Goldman Sachs, interestingly, believes that the IEA decision alone could cut Brent crude by $10-12 a barrel. If financial players change their strategies will this play a big role in pushing oil below $80 a barrel by December - one of the forecasts we read yesterday?
It has been quite a week during which, we think, the chemicals industry and the global economy have gone beyond important turning points.
Hopefully, our coverage has helped. This is the kind of thinking we also provide - in more detail and with workshops - during our ICIS/International eChemNew Normal seminars.
The next event takes place in Houston in October.