Nobody rings a bell at market tops or bottoms. Instead, one has to look for the divergences that suggest the previous trend has run its course. Today, these abound:
• Western financial market volumes are low, whilst prices are rising
• The same is true for oil market volumes, as the chart shows
• June (bottom section) saw record volumes when prices were falling
• Since then, volumes have been much weaker
Equally, recent gains have not taken prices back into the earlier ‘triangle’. This is important to the ‘technical traders’ who follow trends in commodity markets. It implies that previous ‘support’ levels (helping to hold prices higher), have now become ‘resistance’ levels.
Essentially, this suggests those who missed the chance to sell in May are now rushing to make sure they don’t miss the current opportunity.
Plus, of course, there are the fundamentals. It is hard to think of a time since 1982 when these have looked worse:
• Europe is in recession, whilst the US and China are clearly slowing
• Oil prices are in the ‘demand destruction’ zone at >5% of global GDP
• Political uncertainty is rising around the world
• Plus Israel is threatening to attack Iran in the next few weeks
Weak fundamentals can always get weaker, of course. If Israel does attack Iran, oil could easily head to new record levels. But already, weak demand is making it very difficult for companies to pass through today’s higher prices. As one phenol trader told ICIS pricing, ‘high raw material prices are killing some markets’.
Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 24%. “Weak polyester sales prompted major Chinese makers to offer price discounts”
HDPE USA export down 20%. “Material remaining in short supply”
Naphtha Europe down 14%. “The physical condition of the market is relatively weak”
Brent crude oil down 9%
Benzene NWE down 2%. “The fundamental issue of pygas supply is unchanged amid lower refinery rates, lighter feedstock adoption and weak polymer demand”
S&P 500 Index up 4%