Volatility and reversal

The global economic recovery since we climbed out of the depths of the financial and economic crisis since 2009 has been described by many as a V-shaped recovery, refleting the strong rebound off the lows. But this recovery has also been characterized by volatility – volatility in crude oil prices, metals prices, commodity prices, and currency and interest rate movements.

When viewing long-term market trends, watch for extreme volatility to signal major turning points, especially following a long-lasting trend in one direction. Casting an eye on crude oil, the magnitude of daily price movements over the past few weeks has been off the charts.

Daily price swings of 4-5% are becoming more common – Wednesday saw a nearly 5% drop in crude oil prices on the NYMEX to under $100/bbl.

In the US, gasoline consumption fell as consumers protested $4/gal prices – a pittance compared to European prices, but a shocker for the US consumer nonetheless. Demand fell 2.4% in the week ended May 6 – the largest decline in seven consecutive weeks of demand drops.

In the UK on May 8, drivers manning about 150 vehicles staged a day-long protest against high fuel prices, driving at a deliberate pace across main highways to the Shell’s Stanlow oil depot and refinery, where they continued to protest.

The best cure for high prices is high prices. Now consumers are pushing back, as their bills grow from higher gasoline prices, higher food prices, and the price inflation in commodities flowing through to everything from paints to packaged goods.

In the chemical markets, there has been increasing buyer push-back on the relentless rise in major commodities across the board.

In China, prices of low density polyethylene (LDPE) and nylon have been falling, while monoethylene glycol (MEG) has been stuck in neutral after coming off its highs earlier in the year. Europe LDPE and polypropylene (PP) spot prices took a hit last week on the back of plunging crude. In the US, one acrylonitrile (ACN) producer has cut operating rates on record feedstock propylene prices.

Buyers and sellers of chemicals look towards the crude oil price as a gauge, even if oil is not the main feedstock. A major medium-term reversal in trend resulting in declining crude oil prices would give some much-needed relief for beleaguered buyers.

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