Market and product

Last week should have been a greatweek for the speculators. As in July 2008, they were able to spread therumour of imminent Middle East war and upheaval. 5 years ago it was the threat of Israel bombingIran’s nuclear facilities, and leading to a blockade of the Straits ofHormuz. This time it was the threat of the Suez Canal being blocked bycivil war in Egypt.

But one always needs to analysespeculative rallies rather carefully, as they tell us a lot about theunderlying strength of the market. And this one was rather weak, withBrent prices adding just $3/bbl to average $108/bbl for the week. That doesn’t suggest a lot of conviction behind the rally.

Another warning sign was theresponse of the benchmark chemical markets. Of course, they all moved upa little in response. But volume was very limited, whilst the cautiousmood of major players was reinforced by the behaviour of some Asiancompanies, who saw it as a selling rather than buying opportunity, as thecomments below confirm.

Speculators will, of course, remainactive as long as they are being funded by the western central banks. Butthe latest International Energy Agency report was hardly bullish in its outlook highlights:

• “Despite a lacklustre economic outlook, futures markets were buoyed by upheaval in Egypt and supply-side issues
• “Global demand is forecast to grow by 1.2 mb/d in 2014
• “Non-OPEC supply is forecast to increase by 1.3 mb/d in 2014
• “OECD commercial total oil inventories built seasonally by a relatively weak 4.8 mb in May, to 2 683mb. Product stocks rose by 16.8 mb, leaving forward demand cover unchanged at 30.4 days. Preliminary data show that stocks built by a further 23.2 mb in June.
• “North American crude runs surged in May and June ahead of an exceptionally steep seasonal ramp up in global throughputs expected in Q3″

At the same time, the IMF reduced its growth outlook for 2013 and 2014.

As the chart shows, the impact ofthe speculators has been less and less powerful in recent months. Priceshave failed to break out of their trading range, despite the additional $tns offree cash supplied by the central banks, suggesting that this particularasset bubble may finally be nearing its end.

One key factor is theimpact of today’s stronger US$ in pushing prices higher in the majorregions. European Brent is €82/bbl – almost equal to the June2008 peak. Whilst China’s gasoline prices are 28% higher than in 2008 at Rmb 8945/t ($1442/t), when they were cappedto prevent social unrest during the Beijing Olympics.

The IEA’s outlook hardly supportstoday’s continued record levels of crude oil prices. And with China’sleaders now openly suggesting the 7.5% GDP target may not be met, the speculatorswill need a lot more free cash if they are to continue today’s rally for muchlonger.

The chart shows latest benchmarkprice movements since the IeC Downturn Alert launch on 29 April 2011, with ICIS pricingcomments below:

Naphtha Europe, black, down 18%. “Europe is structurally long onnaphtha, and sellers need to export to the US gasoline and Asian petrochemicalsectors to keep stocks in balance.”
PTA China, red, down 20%. “Sellers were eager to offload their cargoes whenprices moved up to their target prices in the wake of limited spot requirementfrom China”
Brent crude oil, blue, down 13%. “Losses reflect continued weakness in boththe US and Asian markets”
HDPE USA export, yellow, down 12%. “Traders are confining themselvesto back-to-back sales, not wanting to build any inventory while price directionis uncertain”
Benzene Europe, green, down 3%. ”The gains have been oil and energy driven,and several players felt the upturn was too sharp and unwarranted given currentsupply/demand fundamentals.”
S&P 500 stock market index, purple, up 23%
US$: yen, orange, up 22%