Markets wait to see what happens next

D'turn 29Jan12.png‘Would you buy, or would you sell?’ is always an interesting question in any market. Petchems provide a particularly balanced answer today.

Buy arguments include – China’s buyers will return from holiday, and will need to restock; gasoline markets are tightening after the Petroplus bankruptcy; bad weather is causing some disruption
Sell arguments include – US GDP data disappointed with inventories showing a big rise; a blockage of the Strait of Hormuz seems less likely in the short-term; European demand remains slow for the time of year

The ‘safe’ answer to the question would therefore be to buy. And this is what has been happening, especially as consumers need to build inventory ahead of proposed price increases. They cannot pass these on downstream, so their profitability depends on buying forward.

The second question, of course, is ‘would you therefore go long?’ And today the ‘safe’ answer would be to simply maintain prudent inventory levels. Markets have been driven by supply-side constraints for many months now, not by strong levels of demand.

The ‘sell’ arguments above create justifiable concern that one day, perhaps not too far away, fundamentals of demand will come back into play. Going ‘long’ would require either a strong belief that demand is returning, or confidence that supply will remain disrupted.

The blog suspects that crude oil market moves may prove decisive in the end. The bankruptcy of European refiner Petroplus is yet another warning sign about the impact of demand destruction at today’s record prices. But equally, oil is still trading in its ‘triangle’ pattern, so it would be premature to anticipate its future direction.

The chart shows market developments over the past year. Product price changes since the 29 April peak, with ICIS pricing comments, are below:

HDPE USA export (purple), down 16%. “Trading was thin, with the Chinese New Year holiday keeping Asian markets at a standstill”.
PTA China (red), down 13%. Markets were closed for Lunar New Year
Brent crude oil (blue dash), down 11%
Naphtha Europe (brown dash), down 11%. “Restocking, delays in the Mediterranean, and higher propane prices which have finally encouraged buyers back to naphtha”.
S&P 500 Index (pink dot), down 4%
Benzene NWE (green), down 3%. “Some key European producers have been aggressively purchasing benzene instead of pygas”.

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 Markets wait to see what happens next

  1. Anne Sasso 30 January, 2012 at 5:31 pm #

    Hi Paul,

    I’m confused by the steep upward trajectory of the benzene line. In past posts, I seem to remember you saying that benzene is predictive. If that’s so, should we be expecting other chems to start increasing in price soon?

    Thanks,
    Anne

  2. Paul Hodges 5 February, 2012 at 1:44 pm #

    Hi Anne

    I’m watching it closely too. For the moment, its simply following trends in financial markets. But if it starts to be pulled higher by end-user demand, that would be significant.

    Paul

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