The US Federal Reserve and the European Central Bank have adopted new and aggressive monetary measures to try and boost US employment and stabilise peripheral Eurozone bond markets. Unfortunately, their actions are more likely to increase the chances of a deeper global downturn than to create economic growth.
Their previous liquidity injections, undertaken in the spirit of doing "whatever it takes" to achieve these goals, have already helped to drive up the price of oil. Investors became concerned about currency risk for both the US$ and the euro, and about inflation risks.
Investors instead see crude oil markets as a potential 'store of value'. Some now even believe oil markets should be seen as part of a broader commodities-based asset class, rivalling equities and fixed interest.
Oil markets have proved unable to absorb these one-sided flows of money. Those value investors who attempted to realign the market with the fundamentals of supply and demand were swept away.
Thus today, as the chart shows, the cost of oil has reached a level which has historically always led to recession. More central bank liquidity injections can only make the situation worse.
This critical issue seems to have been generally ignored. Today, the blog is therefore publishing its first Research Note. The 4 page format allows more in-depth analysis than in a normal blog post. Please click here to download a free copy.
Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 17%. "Prices fell on 18-21 September after reaching a four-month high on 17 September, losing 5% in four days."
Naphtha Europe down 15%. "Demand remains poor and supply is long"
HDPE USA export, down 13%. "Prices gained strength on higher feedstock costs and continuing supply tightness"
Brent crude oil down 11%
Benzene NWE up 4%. "Sharp drops for crude and energy futures saw some price erosion as the week progressed"
S&P 500 Index up 7%