Oil market “bubble” builds, as recession deepens

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Stock markets may have rallied over the past month. But the International Monetary Fund (IMF) sees no cause for optimism. In March, it thought the economy would contract by 0.5% – 1.0%. Now, it is forecasting a contraction of -1.3% in 2009.

The chart, from the Wall Street Journal, compares the current downturn to the average of the 1975, 1982 and 1992 recessions. It is worse, by every measure.

Yet many investors are still more worried about missing the recovery – hence the bear market rallies continue. We have seen such disconnects before, and the fall-out can be very painful when reality dawns.

The blog is particularly worried about the impact of this speculation on crude oil prices. Not only do these remain in contango, with prices for future delivery being higher than today’s. But all the while, oil product demand is slowing, with US demand down 4.3% in 2009 versus 2008. The result is that oil stocks are building:

• Total US inventories are at their highest level since 1990
PetroMatrix estimate US Gulf stocks are only 3mb off all-time highs
• Commerzbank suggest oil in floating storage now totals 100mb

There is therefore a growing risk that the speculative bubble will eventually burst. This could take prices back towards January’s $32/bbl low. In turn, this would destabilise chemical prices and margins, and lead to another wave of destocking down the value chain.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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