By John Richardson
OIL markets remain fundamentally long. There is little to support the notion that the recent price rally has anything to do with anything but confidence that US interest rates will be lower for longer than had been previously expected. A key catalyst for a correction will be whether or not the US Federal Reserve finally raises rates in 2016, perhaps in September.
Meanwhile, fears over Brexit dominate the mood in financial markets, which was a reason given for yesterday’s quite shocking news: That the yield on 10-year government debt had fallen below zero for the first time in history. In other words, investors are so worried about the future that they are prepared to pay the German government to store their money.
But as the UK’s Independent newspaper quite rightly points out the, fall in the returns in German government bonds is not just about Brexit. It is instead also about something that will not go away, regardless of whether or not the Remain or Leave campaigns will on 23 June:
The worry is that large chunks of the developed world are becoming more like Japan, with no economic growth and limited opportunities for the next generation to find decent jobs.
Hence, the newspaper adds that US Treasury yields are at their lowest ever for a country that has already started to tighten economic policy, with Japanese yields at -017.
These bonds yields are in sharp contrast to the recent excitement in the crude market which is, as I said, is mainly the result of the prospect of lower interest rates for longer than had been previously been anticipated. But this additional froth is just one of many asset-price bubbles that are leaving behind long term economic damage, without addressing the central problem: The end of the Economic Supercycle.
So here’s two pieces of advice for chemicals companies:
- In Q3, be very cautious, as there is a substantial risk of an oil-price correction. Price volatility in general also looks likely to continue.
- Focus on the above chart as you adapt your longer term strategy. Too much supply is chasing too much demand not just in the chemicals, but across manufacturing in general. So you need to start much more actively manage your own demand.
The above chart, from American Chemistry Council data, shows that global surplus chemicals capacity in April was at its highest level since the Global Financial Crisis – and much higher than the longer-term trend.
Digging into the data a little deeper, you also find that global chemicals capacity rose by around 15% since 2012, with demand only up by 8%. This is because chemicals companies and investors have confused what have been on the whole strong oil and equity markets since the Global Financial Crisis with a sustainable global economic recovery. But this is simply not the case.