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Japan’s liquidity programme sends oil, gold prices tumbling

Oil markets
By Paul Hodges on 22-Apr-2013

D'turn 19Apr13.pngBrent crude oil prices have now dropped $20/bbl since their February peak at $119/bbl. The major drop has occurred this month, following the Bank of Japan’s decision to introduce its own massive liquidity programme. This confirms the blog’s long-standing argument that the fundamentals of supply/demand had nothing to do with oil’s rise from $30/bbl to $125/bbl since the end of 2008. Instead, it was pension funds seeking to find a ‘store of value‘.

The scale of their intervention has been huge. The IMF note that some funds now have 25% of their money in assets like crude. And now the US$ is rising again, since Japan began its own liquidity programme, they have no reason to continue holding oil and similar assets. Oil’s fall is thus not unique – gold, copper and other commodities have also tumbled as markets begin to realign with the fundamentals of supply and demand.

Of course, the pension funds and their investment bank advisers neither know nor care about the damage they have inflicted on chemical markets. High oil prices have destroyed demand in all regions, as people have to heat their homes and fuel their cars, and so have very little spare cash left over for other purchases.

Even worse may be to come, however. We have no idea how quickly the funds will now exit the market. If they take their time, worrying that the US$ may again decline, then companies should be able to manage the impact on working capital. But if they all move in a herd, then we could instead see prices return relatively rapidly to their historical trading range below $30/bbl.

Between 1900 – 2003, prices were only out of this range for 4 years – during the Iran crisis between 1979-82. But since then, central banks’ intervention has increasingly pushed prices beyond levels that consumers can afford. The real worry now, of course, is what may happen over the summer, when demand will be seasonally even weaker than today.

Many may laugh at the idea that prices could ever return to $30/bbl. Others may think it no more than a 10% probability. But recent market performance is clear evidence that markets today have completely lost touch with their true role of price discovery. Planning ahead during Q2 to cope with the risk of a relatively sudden H2 price collapse may therefore prove to be the best decision your company makes all year.

Benchmark price movements since the IeC Downturn Monitor’s April 2011 launch, and latest ICIS pricing comments are below:
Naphtha Europe, black, down 28%. “Supply is long, despite an open outbound arbitrage to Asia”
PTA China, red, down 22%. “Asia’s idle PTA capacity because of poor margins was at 14MT for the week, one fourth of Asia’s total PTA capacity”
Brent crude oil, blue, down 20%
HDPE USA export, orange, down 18%. “US Gulf prices moved lower, following global prices down, as producers attempt to reduce their inventories by selling into the export market”
Benzene NWE, green, up 6%. “There appears to be no clear consensus on what has kept benzene pricing firm as oil numbers have dropped”
S&P 500 stock market index, purple, up 14%