By John Richardson
THE danger that high oil prices pose to the global economy, and therefore, of course, petrochemicals demand, has been highlighted by a new report from HSBC.
It makes the point that quantitative easing, which has led to investors fleeing a weaker dollar into commodities, is a major contributory factor behind the rally in crude. Equally important is the perception that an escalation of the Iranian crisis would cause major supply disruptions.
But, as HSBC argues in its report:
*The oil market looks far from tight. OECD demand is falling and growth in non-OECD countries is also on the decline. Since last summer, the International Energy Agency (IEA) has downgraded its global demand-growth forecast by 750,000 barrels per day. US oil-product demand has fallen by 4-5 percent so far in 2012 compared with the same period last year. Chinese demand rose by only 1 percent in December last year, as against 8-10 percent in December 2011.
*We have been here before. High oil prices caused demand destruction ahead of the global financial crisis in 2008, and also last year. In 2012, "US shoppers are staying away from the malls and using public transport, rather than there are own cars, to get there," writes HSBC. In petrochemical markets, the blog has heard how affordability is hurting end-users in China, restricting the ability of producers to fully pass-on rises in naphtha costs, which have, of course, been driven by stronger crude.
*Fears over a supply crunch, should Iran close the Strait of Hormuz (in itself, an unlikely scenario, we think, because of the consequences for Iran) are overplayed, adds the bank. Russia and Brazil are increasing production, as is the US as a result of the shale-oil revolution. HSBC believes that in the unlikely event that Iran was to close the Strait of Hormuz, it would be unable to maintain the closure for long. Releases of crude from strategic reserves, the diversion of Middle East crude to world markets via the Red Sea, and increased Saudi Arabian, Angolan and Nigerian production, would also be enough to make up for any shortfall.
But as we discussed in chapter 3 of our e-book, Boom, Gloom & The New Normal, oil is essentially a financial instrument where supply and demand fundamentals matter far less than the role of the speculators.
The speculators are again threatening the global economy, thanks to the disproportionate influence of the financial sector on Western economies. In chapter 10 of our book, due out later this month, we suggest ways in which this influence can be reduced.