China’s Dalian trading suggests trouble lies ahead

Chemical companies, Consumer demand, Economic growth, Financial Events, Futures trading, Oil markets

Dalian Apr11.pngThey don’t ring bells at market tops, to warn about what might happen next. But the above chart may turn out to be the next best thing.

It shows the relationship between WTI crude oil prices (blue line) versus LLDPE (linear low density polyethylene, red line) on China’s Dalian futures exchange.

The exchange has been a hot-bed of speculation for the past 2 years, powered by China’s easy money programme. LLDPE has been the main proxy for those betting on the direction of oil prices. In some months, the volume traded has reached nearly 100 million tonnes.

Critically, since Q3 2008, price moves for WTI and LLDPE have mirrored each other, up and down. But now LLDPE has failed to follow the latest upward move on WTI. The last time this happened was during WTI’s final run to $147/bbl, as demand destruction intensified.

And as Petromatrix note, China’s own diesel and gasoline prices are now 30% higher than in July 2008, due to the removal of price controls.

The blog’s friends in the trading community have been correctly bullish for the past 2 years. They say it is still too early to go short on crude oil, given the momentum that has built up. But the forces behind this speculative mania may be ending:

• China bank lending has slowed, and interest rates are rising
• The US Fed may well end its QE2 lending programme in June.

Central bank liquidity has been the life-blood of the rally over the past 2 years. As and when it slows, trouble lies ahead.

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