Cracks have begun to appear in commodity markets as QE2 ends.
Crude oil has now fallen $12/bbl on demand worries since the blog suggested a top might be close. And the Wall Street Journal has confirmed that the super-computers who have driven prices skyward, are now beginning to retire from the party.
This builds on recent evidence that chemical buyers feel less need to panic-buy in front of expected higher prices. Equally, the recent divergence between US WTI crude oil prices and natural gas is also starting to come under pressure.
On an energy content basis, WTI should trade at ~6 times gas. As the chart shows:
• Between 1986 – 2008, the ratio averaged 9.9
• This can be explained by the fact that oil is more flexible to use
• But since 2009, the ratio has averaged 18.5
Nobody has been able to explain to the blog why this ratio has doubled. Of course, shale gas has vastly increased potential US gas reserves. But US gas supplies have been in surplus over most of the past 30 years.
Equally, there is no shortage of crude oil. US inventories are near record levels, whilst global stocks are also comfortable. And demand destruction is clearly underway around the world, as a result of today’s artificially high prices.
Of course, the high ratio has been wonderful news for the US petchem industry, as the blog will discuss on Tuesday. But more recently, this has led to a sense of euphoria, manifested by a number of announcements about new cracker expansions.
One of the great investment maxims is “If it looks too good to be true, then it probably is”. The blog therefore believes that today’s WTI ratios to natural gas are likely to prove transient.
It would be happy to discuss this argument with any company Board debating a cracker investment based on the opposite assumption.