Crude oil markets lose support

WTI, $ Jan10.JPGThe oil market rally seems finally to be running out of steam. For months now, it has been driven by the ‘correlation trade’, whereby Wall Street traders sell the US$ and buy crude oil. But as the chart shows, the two lines have now begun to diverge.

Fundamentals have clearly started to affect the €:$ rate, as real-world concerns about the Greek economy no longer make the euro a one-way bet. The blog suggested in November that traders would find it difficult to push the euro above $1.50 : €1.00. As the blue line shows, it has since retreated quite significantly, and is now around $1.39.

The monthly average crude oil price (black line) is now at the $80bbl resistance level. And in futures markets, where Forward supplies trade, a major change has taken place. In H1 last year, the contango between the current month and the future month was extraordinarily high at $20/bbl.

This gave traders the ability to store oil offshore and make a certain profit. But now, the contango has almost disappeared. Forward prices for May are only $1bbl higher than the current month, not enough to allow traders to store oil offshore profitably. So they may now start bringing all 150mbls of floating oil back onshore again. If they do, there seems little to stop oil moving back to $40bbl, apart from geopolitical events.

As the blog has argued before, this kind of volatility is exactly what the chemical industry does not need, with the economy already so fragile.

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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