The blog still owns the lapel button it was given when running ICI’s feedstock and petchem trading office in Houston, Texas. Its advice for any trader is excellent – ‘The Trend is Your Friend’. But as all traders learn over time, there are moments when the trend can change. And sometimes, when change happens, it takes place suddenly and with devastating effect for profits.
This is why it is very nervous about the current state of the oil market. There are more and more signs that the lengthy upward trend that began in 2009 is breaking down. As the chart of recent daily Brent oil prices shows, one warning sign is that volatility has increased quite sharply.
The issue is simple, whether traders still believe that the US Federal Reserve will provide enough liquidity to keep prices moving higher. Once they lose this faith, then prices will instead start to reconnect with the fundamentals of supply/demand. Friday morning’s Reuters’ oil report aptly describes the highly dangerous fairy tale world in which we are living:
“Oil prices were underpinned by a round of weak U.S. economic data, indicating growth was slower than expected in the first quarter and revealing a surprise rise in jobless claims on Thursday. The data was supportive because signs the economy was still fragile helped reassure investors money policy would remain accommodative.”
In other words, the market currently believes lack of demand is a ‘good thing’, as this means the US Federal Reserve will likely continue the supply of cheap liquidity to keep prices high.
US margin debt is also flashing a red alert, having just set a new record at 2.25% of GDP. It measures the amount borrowed to invest in financial markets, and confirms the speculative mania created by the liquidity programmes. It has only reached this level twice before – in 2000 and 2007. We all know what happened afterwards in terms of market performance.
Latest benchmark price movements since January and ICIS pricing comments are below:
PTA China, down 11%. “Market lacks upward momentum because of the weak macroeconomic environment and lower feedstock prices”
Naphtha Europe, black, down 11%. “Supply is lengthening as high-volume exports to Asia have come to a close.”
Benzene NWE, down 9%. “Any upturn on May pricing was limited by several styrene players selling benzene instead of consuming it for styrene production”
Brent crude oil, down 8%
HDPE USA export, up 9%. “Buyers are not eager to buy at the higher prices and are waiting to see if offers move lower”
S&P 500 stock market index, up 11%
US$: yen, up 14%