China’s Dalian trading suggests trouble lies ahead

Dalian Apr11.pngThey don’t ring bells at market tops, to warn about what might happen next. But the above chart may turn out to be the next best thing.

It shows the relationship between WTI crude oil prices (blue line) versus LLDPE (linear low density polyethylene, red line) on China’s Dalian futures exchange.

The exchange has been a hot-bed of speculation for the past 2 years, powered by China’s easy money programme. LLDPE has been the main proxy for those betting on the direction of oil prices. In some months, the volume traded has reached nearly 100 million tonnes.

Critically, since Q3 2008, price moves for WTI and LLDPE have mirrored each other, up and down. But now LLDPE has failed to follow the latest upward move on WTI. The last time this happened was during WTI’s final run to $147/bbl, as demand destruction intensified.

And as Petromatrix note, China’s own diesel and gasoline prices are now 30% higher than in July 2008, due to the removal of price controls.

The blog’s friends in the trading community have been correctly bullish for the past 2 years. They say it is still too early to go short on crude oil, given the momentum that has built up. But the forces behind this speculative mania may be ending:

• China bank lending has slowed, and interest rates are rising
• The US Fed may well end its QE2 lending programme in June.

Central bank liquidity has been the life-blood of the rally over the past 2 years. As and when it slows, trouble lies ahead.

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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2 Responses to China’s Dalian trading suggests trouble lies ahead

  1. john 12 April, 2011 at 12:10 am #

    This is really interesting. As a new reader to the blog, what is so critical regarding the LLDPE to the manufacturing market. Would it be better to consider demand more closely related to the consumer or industrial usage

  2. Paul Hodges 15 April, 2011 at 4:26 pm #

    John

    Thanks for your comment. This blog focuses along the value chain from crude oil and feedstocks down to retail sales and housing. Its just you picked an upstream comment on your first visit. If you look on the tag cloud, you’ll find lots about consumer and industrial developments.

    Paul

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