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The Immediate Dubai Impact

Business, China, Economics, Fibre Intermediates, Middle East, US
By John Richardson on 30-Nov-2009

On A Very Sticky Wicket




By John Richardson

As one my colleagues said – it’s a good job the US stock markets were closed for Thanksgiving.

Lots of efforts are being made to talk the Dubai World crisis and down – and despite drops in Middle East market equities – Asian markets rallied today.

But the next few days could still be important with a lot depending on how neighbouring governments respond.

Oil markets have been pretty much out-of-sync with real demand since 2003.

But with the rise in the US dollar carry trade and Western growth so fragile, the risk of another sharp correction is higher now than when the world economy was in good shape. Such a collapse would be a mini version of what happened in Q4 last year.

I did a very unscientific survey of 30 traders, producers, buyers and logistics people at the APPEC oil and gas conference in Singapore a few weeks ago.

Twenty three said oil prices, based on fundamentals, should be $40-50 a barrel (three of those who disagreed and thought should be where they are now were financial analysts!).

So perhaps the biggest immediate risk from Dubai is a big strengthening of the dollar and a connected drop in equities and crude. 

As I mentioned in my previoust post, I was in Shanghai last week. The local linear-low density polyethylene (LLDPE) polyvinyl chloride (PVC) and purified terephthalic acid (PTA) futures contracts all dipped sharply when the Dubai news broke.

My colleagues at CBI China said that because of the dip in these contracts, very few buyers were willing to acquire physical cargoes on Thursday and Friday.

This could continue as long as the markets worry that this might be another Lehman Bros (fortunately, this seems very unlikely at the moment).