Crude oil falls as markets reassess economic outlook

WTI May10.pngOn 6 May, the blog warned that “it would be very nervous indeed about holding a long position” in crude oil. And as the chart shows, its fears were well-founded. Since 4 May:

• WTI has fallen 19%, and $16/bbl, from its $86/bbl peak
• The euro has also fallen 8%, and 6c, versus the US$

The suddenness of the change highlights the extremely short-term nature of today’s financial markets, where so-called ‘high-velocity trading’ now accounts for up to 75% of daily trading volumes.

This trading often has an average holding period of just 11 seconds, and makes no effort to understand market fundamentals. Instead, it uses high-speed computers to capture fractional changes in bid-offer spreads. And, of course, it creates the potential for extreme volatility, when markets suddenly readjust to the real world.

For months, markets have been trading positively on the assumption of a V-shaped economic recovery. This has focused on perceived strong growth in China, and led to expectations of a tight oil market. In turn, as noted in the blog, this has driven the ‘correlation trade’ where the US$ weakens as the cost of its oil imports increases.

Now, the basic flaw in this assumption has begun to appear. China’s growth is slowing, whilst Europe is heading for budget cutbacks and austerity. Key elements of the US recovery, such as housebuilding permits, are also looking less than certain. If markets had focused more on fundamentals, none of this would have come as a surprise.

Instead, the chemical industry, and others who live in the real world, will be left to pick up the pieces. The rise of the US$ is already causing concern in China, as it makes its exports less competitive. Equally, falling oil prices may well encourage destocking down the chemicals value chain, just as we come into the seasonally weak Q3 period.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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