When the blog launched its IeC Downturn Alert in early May, it noted that “they don’t ring bells at market turning points”. However, it hoped that the Alert would provide a replacement.
It seems to be doing its job. As the chart above shows, prices for all the products highlighted are now down between 9% – 15%. Financial markets seem also to have peaked, and so the blog is adding data for the US S&P 500 (red dots), as this is the main global index.
The blog fears this downturn may have a long way yet to go.
Policymakers, still very bullish when the Alert was introduced, are now talking of a “soft patch“. This greatly minimises the problem, due to a fundamental misreading of future demand patterns. The blog will discuss this critical issue further on Wednesday. This is also, of course, the basis for its new eBook, jointly authored with John Richardson.
ICIS pricing reports highlight the position:
Naphtha Europe (brown dashed line), down 13%. “Market has become increasingly oversupplied this week due to a paucity of buying interest”.
Benzene NWE (green), down 15%. Benzene is the blog’s most reliable petchem market indicator, and first warned of the 2008 collapse.
PTA China (red), down 10%. “Peak season in China’s textile industry has largely ended”; Indian inventories are reported at 2-3 months of demand.
HDPE USA (purple), down 9% . “Prices would need to come down by 10-12c/lb ($220-260/t) to compete with falling prices in Asia/Middle East”.
S&P 500 (pink, dotted), down 7%.
These are major declines, especially over just 6 weeks. We are also unlikely to see much improvement over the summer months, so it may be September before we get a chance to properly assess the real state of end-user demand. Unlike most CEOs, the blog is also not optimistic about what we will then discover.
The main event last week was the failed OPEC meeting. The major investment banks, keen to protect their outsize profits on commodities trading, made great efforts to spin this as positive for prices.
But Friday’s market action, when prices fell $2.50/bbl, tells us much more about likely future market directions. This is because there is one simple rule for successful oil trading, which is “never bet against Saudi Arabia”.
And since the OPEC meeting, the world’s largest oil producer has indicated it will increase production by over 10% from recent levels, to 10mbd. This is unlikely to prove a bullish sign for prices.
In turn, destocking is therefore likely to continue down the value chain.