"Will he, won't he?" That was the only question in oil markets last week. On Wednesday, US Fed chairman Ben Bernanke seemed to suggest that QE3 might arrive, to follow on from his QE2 'LifeBoat' for the economy.
As the chart shows, oil prices leapt $3/bbl within 2 hours as he spoke. But then Bernanke's second thoughts led to a retreat on Thursday.
This is further powerful evidence for the blog's argument that today's high oil prices have nothing to do with shortages (global inventories are close to record highs) or supply problems. They are really due to:
• The Fed's aim to promote US exports via a lower US$, which encourages investors to buy commodities such as oil for their 'tangible value'
• The investment banks' focus on selling profitable derivative contracts to pension funds, thus creating strong 'paper' demand for commodities
• The availability of cheap money from the Fed to fund High Speed Trading, based on arbitraging oil and other financial assets
It is all a very long way from the blog's early days in chemicals trading in the UK and Houston, Texas, when fundamentals drove prices.
But Bernanke's sudden backtrack on Thursday could be very significant. The Fed would find it difficult to ignore opposition to QE3 from senior Republicans. Already, Senator Richard Shelby has warned "the Fed may be going in the wrong direction."
The detailed moves since the IeC Downturn Alert launched at end-April, with ICIS pricing commentary on market sentiment last week, are below:
HDPE USA export down 17%. "US prices are still a little too high to compete with global prices, despite price increases in China and India".
PTA China down 13%. "Sellers' sentiment was bolstered by the strength in futures".
Benzene NWE down 11%. "Stronger US market as well as temporary gains seen for crude/energy futures helped firm European benzene values."
Naphtha Europe down 10%. Reuters reported Rotterdam naphtha stocks at 2011 highs (3 times last year's), due to weak petchem/US gasoline demand.
Brent crude oil down 6%.
US S&P 500 Index down 4%. In another sign that fundamentals may be re-emerging, it dropped to a critical technical support level at 1316, the convergence of the 50 day and 100 day moving average.