Chemicals set for “strong” year-end as oil jumps 7%

WTI Nov10.pngLast week, the blog repeated its warning that crude oil was preparing for a big move, either up or down. And prices then jumped 7%, to a two-year high of $87.49/bbl. So the ‘triangle formation’ proved its predictive power again.

As the above chart shows, from Petromatrix, the driver behind the move was the Large Speculators on the Futures markets (ICE and NYMEX). In anticipation of the US Fed’s QE2 Lifeboat programme kicking off, they:

• Bought a further 12.5m bbls, about 15% of total daily consumption
• Took Speculative length to an all-time record high

2010 (blue line) has seen more Speculative buying than any previous year. Net length is now ~150mbbls, versus March 2008’s peak of 115mbbls (green line).

At the same time, of course, the world is seeing near record levels of physical stock. And OPEC’s own forecast last week suggested global demand in 2011 would only equal 2007’s level. Even in 2014, OPEC expects to have over 6mbbls/day of spare capacity.

In the short-term, however, the Speculators rule, not these fundamentals. So the most likely outlook for chemical markets for the rest of Q4 is that:

• Speculators will continue to buy oil futures and sell the US$
• In turn, this will force chemical company purchasing managers to buy forward
• CFOs will probably allow inventories to increase, given good cash-flow

In turn, this should lead to a strong end to the year, as far as chemical volumes are concerned.

Of course, it is possible that the US Fed will be proved correct. It might happen that a lower US$, and higher commodity prices, will restore Western consumer confidence and banish current debt worries. But the blog would not invest its own money on this basis.

It fears it is far more likely that we are in the middle of yet another speculative bubble. Whilst oil prices are rising, underlying demand is almost certainly weakening. Once again, as in the mid-2000’s, the Fed’s misguided policies are treating symptoms, rather than causes.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. 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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