Oil market weakness suggests recession now more likely than Middle East war

Oil markets remain poised between fear of recession and fear of a US attack on Iran. But gradually it seems that fears about a war are reducing, whilst President Trump’s decision to ramp up the trade war with China makes recession far more likely.

The chart of Brent prices captures the current uncertainties:

  • It shows monthly prices for Brent since 1983 and highlights the conflicting risks
  • The bulls have been battling to push prices higher, but their confidence is weakening
  • The bears were hurt by the stimulus from US tax cuts and OPEC output cuts
  • But June’s abandonment of the Iran attack lifted their confidence

As a member of the President’s national security advisory team has noted:

“This is a president who was elected to get us out of war. He doesn’t want war with Iran.”

With fears about a potential war reducing, at least for the moment, attention has instead turned to issues of supply and demand.  And here, again, the balance of different factors has turned negative:

  • As the second chart shows, supply from the 3 major countries remains at a high level
  • The US is the largest producer, and August’s output is now recovering after the slowdown in the Gulf of Mexico due to Hurricane Barry, and the EIA is forecasting new record highs this year and 2020
  • 3 new pipelines are also coming online during H2, which will boost US oil export potential
  • Meanwhile Russia, as usual, has failed to follow through on its commitment to the OPEC cuts. Its output rose by 2% in January-July versus 2018, despite May/June’s contamination problems
  • As always with OPEC output cuts, Saudi Arabia has been forced to fill the gap. Its volume dipped to 9.8mbd in July, well below the 11mbd peak last November

Overall, global supply has remained strong with EIA estimating Q2 output at 100.6mbd versus 99.8mbd in Q2 last year. Contrary to last year’s optimism over global economic recovery, EIA suggests Q2 consumption only rose to 100.3mbd, versus 99.6mbd in Q2 last year.

And the normally bullish International Energy Agency last week cut its demand forecast for this year and 2020 warning:

“The outlook is fragile with a greater likelihood of a downward revision than an upward one…Under our current assumptions, in 2020, the oil market will be well supplied.”

The third chart, from Orbital Insight, highlights the changes that have been taking place in inventory levels in the major regions.

Generated from satellite images of floating roof tank farms, it is based on estimates of the volume of oil in each tank, which are then aggregated to regional or country level.

Oil markets are by nature opaque. But Orbital’s data does show a very high correlation with EIA’s estimates for  Cushing – where the official data is very reliable.

As discussed here many times before, the chemical industry is the best leading indicator for the global economy, due to its wide range of applications and geographic coverage.  The fourth chart shows the steady downward trend since December 2017 in the data on Capacity Utilisation from the American Chemistry Council.

Q2 has shown the usual seasonal ‘bounce’,  but key end-user markets such as electronics, autos and housing are also clearly weakening, as discussed last week for smartphones.  And Bloomberg has reported that US inventory levels at major warehouses are close to being full.

I suggested back in May that prudent companies would develop a scenario approach that planned for both war and recession, given that the outcome was then essentially unknowable.

Today, both scenarios are clearly still possible. But it would seem sensible to now step up planning for recession, given the downbeat signals from oil and chemical markets.




Chemical company results highlight growing weakness down the value chains

Investec Nov16Looking down the table below of chemical company’s reports, its hard to be very optimistic about the outlook. The first half of the year disappointed, as I noted in August.  Then Q3 saw major volatility as the hedge funds and high frequency traders played their games in the oil market – prices weakened as demand slowed, but then the story about another effort at an OPEC-Russia quota deal pushed oil prices back up again.

This meant that companies did a small amount of stock-building over the summer, when normally they would be using less due to the holiday period.  But there was no major demand pull from the downstream end of the value chain.  Of course, some companies still did relatively well – either because of luck, in being at the right place at the right time, or because they have a very robust strategy.

For most, however, the chart above from analysts Investec confirms the market weakness with which they have struggled in recent weeks, as Paul Satchell describes.  His Volume Proxy indicator is showing a downturn in all 3 regions – most unusual for this time of year, when companies are normally operating at high rates to complete orders before the Christmas break.  As Satchell comments:

“The index has proved to be good at indicating a turn in chemicals activity. It has shown surprising weakness in Europe over the past two weeks..and as Satchell adds

“The relatively benign operating environments enjoyed by many chemicals companies since late 1Q16 have led to a degree of complacency in the investment community. The paucity of negative surprises during that period has been implicitly taken as indicating demand robustness, a view with which we have never felt comfortable. If, as now looks possible, 4Q delivers a surprise negative end to 2016, the sector would be at risk of down-rating.”

His message parallels that being sent by the American Chemistry Council’s Capacity Utilisation data.  Prudent companies and investors will already be preparing for a recession in 2017, as well as for major disruption as President-Elect Trump’s radical new policies get closer to being enacted.


Advanced. “Weighed down by declines in polypropylene prices”
Air Products. “Higher volumes driven by the Saudi joint venture were counterbalanced by lower energy pass-through and currency headwinds”
Akzo Nobel. “The market environment remains uncertain with challenging conditions in several countries and segments. Deflationary pressures and currency headwinds are expected to continue”
Alpek. “Subpar polyester segment results amid unfavourable oil and feedstock prices”
Arkema. “Improved margins at its high performance materials and coating solutions segments”
Asahi Kasei. “Lower styrene sales”
BASF. “Current volatile and challenging environment”
BP. “ Petrochemicals business, delivered resilient results”
Braskem. “Lower earnings across many of its divisions and headwinds from local currency appreciation”
Celanese. “Low acetyls chain utilisation rates in China and modest growth in North America and Europe”
Chemours. “Costs fell faster than sales”
Chemtura. “Cost of goods falling faster than sales”
Clariant. “Mid-term target of reaching a position in the top tier of the specialty chemicals industry”
Covestro. “Despite booming operating profits posted during the quarter – Covestro’s pricing power continued to fall”
Croda. “Demand remains subdued in a number of its end-markets”
DSM. “High margins at its materials division”
Dow. “Higher restructuring costs and lower divestiture gains”
DuPont. “Volumes rose 3% year on year, despite a tough macro-economic backdrop”
Eastman. “Continued competitive pressures due to lower oil prices and weak demand in Asia Pacific”
Evonik. “Lower raw material prices were passed on to customers”
ExxonMobil. “Tighter margins and higher maintenance expenses”
WR Grace. “Overall margin improvement and strong cash flow”
Hexion. “Slowdown in oilfield drilling”
Honeywell. “Higher sales volumes for catalysts and “productivity net of inflation”
Huntsman. “declines in earnings for polyurethances, performance products and advanced materials”
IRPC. “Increase in volumes failed to offset the decline in product prices.”
Idemitsu Kosan. “Narrowing of margins for styrene and other products”
Kemira. “Lower sales amid improved margins and lower fixed costs”
Kronos. “Rise in sales and the decline in cost”
LG Chem. “Weighed down partly by a stronger won”
Linde.” The group will be rolling out a new cost saving plan”
Methanex. “Average realised methanol price declined 27% year on year”
Mexichem. “Decline in costs was not large enough to offset the decline in sales
Mitsui. “Strong domestic demand”
Olin. “Higher costs for natural gas and purchased ethylene”
Oxychem. “lower sales volumes and higher costs”
PKN Orlen. “Lower petrochemical and refining product margins and sales”
PPG. “Broad deceleration of growth trends, where most of our coatings businesses experienced lower growth rates compared to the second quarter,”
PetroRabigh. “Weighed by lower petrochemical prices as well as plant turnarounds.”
PolyOne. “Higher restructuring and acquisition-related charges and a weaker performance for its specialties division”
Praxair. “Cost reduction actions in response to weaker underlying industrial activity in the Americas and Asia”
Reliance. “Higher sales volumes for catalysts and “productivity net of inflation”
Repsol. “Sales of petrochemical products rose”
SABIC. “Lower sales prices and lower sales volumes”
Sahara. “Sales declined while expenses increased”
Saudi Kayan. “Higher production and sales, as well as lower feedstock costs”
Siam Cement. “Strong performance in its core chemicals business”
Shell. “Stronger base chemicals industry conditions driven by tight supply in the Tosoh. “Improved trading conditions”
United States and Asia and improved operating performance in Europe”
Sherwin-Williams. “Revenue growth on a comparable basis slowed sequentially”
Sipchem. “Production cost increased due to higher gas feedstock, fuel and energy prices”
Solvay. “Softer demand in some our markets compared to last year”
Stepan. “Struggling surfactants sales in Europe and Latin America could not offset higher polymers sales”
Synthos. “Profitability of its styrenics businesses squeezed”
Teijin. “Concerns about further deceleration in economic growth cannot be dispelled, based on potential risks including protracted negotiations on the UK’s exit from the EU and economic corrections in response to the China’s excessive levels of investment,”
Trinseo. “Costs fell faster than sales”
Tronox. “Costs fell much faster than sales”
Unilever. “Economic fundamentals remain weak and volatile”
Unipetrol. “Full production are expected by the end of October”
Univar. “An overall sluggish economy”
Versalis. “Unfavourable trading environment with worsening margins of cracker, polyethylene and styrene”
Vopak. “Positive business developments”
Wacker. “Stronger demand for chemicals and semiconductor silicon wafers”
Westlake. “Transaction and integration costs from the purchase of rival Axiall”
Williams. “Higher olefins margins, lower operating and maintenance expenses”
Yansab. “Higher sales volumes and lower feedstock costs”

Forget the IMF: global chemicals are your guide to future performance

The chemical industry provides a far better guide to the economic outlook than the IMF or any economic forecaster, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog
ACC Nov16

The global chemical industry has long been the best real-time indicator of the global economy. This is partly because of its size, as the third-largest industry in the world after agriculture and energy, but also because of its global and application reach. Every country in the world uses relatively large volumes of chemicals, and their applications cover virtually all sectors of the economy, from plastics, energy and agriculture to pharmaceuticals, detergents and textiles.

The first chart confirms the position, showing the latest IMF data for global GDP versus the American Chemistry Council’s (ACC) data for global chemical Capacity Utilisation (CU%) since 1988, in terms of percentage change from the previous year:

  The IMF data are for the percentage change in global GDP at constant prices (their “headline number”), using the October 2016 World Economic Outlook
  The ACC data show the percentage change in CU% updated to include reported data for August 2016

As can be seen, there is extremely close historical correlation between the two sets of data. But crucially, the ACC data are real-time. They are produced within a few weeks of the end of each month, whereas the IMF data only appear after a time lag of many months.

Equally important is that the IMF’s forecasts have proved to be wildly over-optimistic since the start of the financial crisis, as demographic headwinds have now replaced the tailwinds which created the baby boomer-led supercycle that began in 1983. Had the ACC’s data been used as the base case, unnecessary investment would have been discouraged. Even more importantly, policymakers’ wishful thinking about the ability of monetary policy to restore economic growth would have been challenged much earlier.

ACC Nov16a

The ACC data are equally valuable when it comes to understanding the outlook for individual country economies, as the second chart confirms. It shows developments since 2014 for the Bric countries:

Brazil has been the most consistent, but unfortunately in a negative sense. Its chemical production went negative in mid-June 2014, providing investors and companies with ample warning that major problems lay ahead for the economy. The chart provides some hope that the situation may be improving, but cautious observers may be forgiven for worrying that production has yet to record a positive performance after more than two years.

Russia has provided the most volatile performance, due to oil price movements. The key issue is that lower oil prices support chemical demand, as consumers need to spend less on essentials such as transport and heating and have more discretionary income. Production was down 11 per cent in July 2014, just before the oil price collapse, but then rebounded to a positive 15 per cent by September 2015. Since them, of course, the doubling of oil prices since the New Year has hit output again, leaving it up by around 5 per cent.

India has also been volatile. Production tumbled during the run-up to premier Narendra Modi’s election in 2014, and remained negative into the early part of 2015. Since then, production has been in positive territory, averaging around 4 per cent since March 2015, as tangible evidence of economic reform has begun to appear.

China has provided the most stable performance, with production fluctuating between a low of 3 per cent and a high of 10 per cent over the period. Key support has been provided by the government’s drive to increase China’s self-sufficiency. This has often meant that imports, rather than domestic production, have taken the pain of slowing domestic demand. In some major products, such as PVC, China has actually moved from being the world’s leading importer to become a net exporter.

Chemical industry performance is therefore not just an excellent guide to the outlook for the global economy. It is also a reliable indicator of the economic state of the world’s major economies. The fact that the global CU% has fallen every month this year, and is now at just 78.8 per cent – nearly equal to its post-crisis low of 77.7 per cent in March 2009 – is therefore grounds for concern. It contradicts the buoyancy being seen in a number of major financial markets and suggests that investors may find it is better to travel in hope than to arrive.

Paul Hodges publishes The pH Report, providing investors and companies with insight on the impact of demographic changes on the economy.

Global demand slowdown hits chemical industry results

ACC Aug16Its not been a great 6 months for the global chemical industry, and my usual quarterly survey of company results confirms the disappointment.

The first half of the year is typically the strongest, for seasonal reasons, as companies come back to work after the Christmas holiday and prepare for the peak car-buying and construction periods – before consumers head off on their summer holidays.  But as the chart of global capacity utilisation (CU%) shows, the CU% has fallen every single month since January.  This has only happened twice before – in 2001 and 2008 – in the 30-years that the American Chemical Council has been collecting the data. And neither year turned out well for the global economy.

This downbeat macro environment has had its effect on company results.  Akzo Nobel report that “the market environment in 2016 remains uncertain”, whilst industry leader BASF talks of “challenging market conditions”. Unusually, reports from major distributors are also downbeat, with Brenntag describing “persistently weak demand in N America” and Univar talking of “sluggish industrial demand”.

And since Q2, we have had the Brexit vote, and the continuing turmoil in currency, oil and bond markets.  It would be a surprise, to say the least, to see a recovery being reported at the end of this quarter.  Realistically, companies and investors would be wise to assume, as their base case, that the best of 2016 is already behind us in terms of both volume and profits.

Air Products. “Sales revenue was down slightly”
Akzo Nobel. “The market environment in 2016 remains uncertain, with challenging conditions in several countries and segments. Deflationary pressures and currency headwinds are expected to continue.”
Arkema. “Varied geographical exposure allows it to weather subdued economic growth in Europe”
Ashland. “Weak energy markets also dragged down sales”
Axiall. “Representing the fourth consecutive quarter of losses, company performance remains weighted by lower PVC, VCM and chlorinated derivatives prices”
BASF. “A continuation of the currently challenging market conditions along with substantial risks”
BP. “Stronger operations and margin optimization in a petrochemicals environment similar to the same period of 2015”
Braskem. “Sales rose due to higher volumes, whilst the Brazilian real weakened 14% year on year.
Brenntag. “Persistently weak demand in North America”
Celanese. “Lower general expenses and a decline in spending for research and development”
Chemours. “Lower costs were offset by asset-impairment charges”
Chevron. “Reflected lower oil prices and our ongoing adjustment to a lower oil price world”
Clariant. “Continued challenging economic environment”
Covestro. “plant utilization rates are improving, allowing us to realize higher core volumes and increase profitability,”
Croda.” we remain cautious given the continued economic uncertainty”
Dow. “Pace of economic growth remained uneven across the major geographies”
DSM. “Global macro-economic developments remain a concern”
DuPont. “growth in volumes was more than offset by pressure from local prices, currency exchange issues and product portfolio”
Eastman. “olefin spreads have decreased and the company is facing more competition from the Asia Pacific region”
ExxonMobil. ““Volume and mix effects increased chemicals earnings”
Hexion. “Diversified portfolio largely offset economic volatility in Latin America and softer oilfield proppant results.”
Honeywell. Segment margins contracted 20 basis points, to 21.1%, on lower volume and continued investments for growth.
Huntsman. “Our MDI margins are expanding, our Performance Products margins are healthy and our advanced materials business is maintaining strong margins”
INEOS. Stronger market conditions in Europe because of a weaker euro were offset by market weakness and turnarounds in Asia
Kronos. “Manufacturing and raw-material costs had fallen year on year”
LG Chem. stabilising feedstock prices and peak seasonal demand for its products
LyondellBasell. “Continued strong polyolefin performance and seasonally stronger fuel margins”
Medichem. “Costs arising from the explosion at the Parajitos vinyl chloride monomer plant”
Olin. “Net loss narrowed amid lower restructuring charges”
Mitsubishi Gas. Higher earnings from its engineering plastics-related subsidiary”
OMV. “Lower propylene margins”
Oxiteno. “Sales fell while costs remained steady”
PKN Orlen. “Devaluation of the Polish currency helping to counter negative outcomes such as decling petrochemical margins”
PPG. “stronger earnings from performance and industrial coatings”
PTT. “Lower product prices and an outage at a cracker unit”
Pemex. “Pemex is producing less feedstock, be it methane, ethane, olefins or aromatics”
Petron. “Higher sales volumes and strong margins”
Petronas. “Product prices fell in tandem with plunging crude oil prices”
Phillips 66. “Higher polyethylene sales prices and margins”
Polyone. “Overall, economic conditions remain sluggish”
Praxair. “Globally, consumer-related end-markets remained healthy”
Reliance. “Strong operating performance from refining and petrochemicals businesses coupled with favorable exchange rate movement enhanced the operating profit,”
Repsol. “Sales volumes rose by 3.7% year on year”
S-Oil. “higher margins offset the decline in revenues”
SABIC. “Lower average sales prices”
Sahara. “strong sales and production”
Saudi Kayan. “lower feedstock costs and improved operational performance”
Shell. “Weaker intermediates demand and reduced availability”
Sherwin Williams. “good sales on store
Shin-Etsu. “Shipments of PVC increased overseas, but domestic shipments fell amid plant turnarounds”
Siam Cement. “strong earnings growth from its core chemicals business”
Sipchem. “ lower selling prices of products offsetting higher production and sales volumes”
Solvay. “A context of lower raw material and energy costs”
Sumitomo. “Weighed down by the strength of the Japanese yen”
Synthomer. “Total volumes in Europe were broadly flat”
Tasnee. “ operational improvement and lower feedstock costs”
Technip. “Strong subsea performance”
TOTAL. “refining and chemicals business posted a 23% year-on-year drop in its adjusted operating income”
Trinseo. “Lower costs in raw materials partially offset by higher sales volumes and favourable exchange rates”
Tronox. “We believe pigment inventories are normal or below normal at both customer and producer levels across the globe”
Ube. “Weak caprolactam market conditions”
Univar. “As expected, we continued to face challenges in the second quarter with sluggish industrial demand, negative comparisons in upstream oil and gas, and lower average selling prices”
Wacker. “Risks for the global economy remain high”
Westlake. “Production problems, costs associated with recent acquisitions and pending acquisitions”

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 57%
Naphtha Europe, down 58%. “Naphtha market long; gasoline price gains falter, resume”
Benzene Europe, down 51%. “The spike in European pricing in July was driven by production problems in the region”
PTA China, down 41%. “Given the current macroeconomic factors and rangebound crude oil levels, prices are not expected to swing upwards by much”
HDPE US export, down 33%. “Talk circulated of lower prices”
S&P 500 stock market index, up 12%
US$ Index, up 17%

Global chemical operating rates remain below SuperCycle levels

ACC OR Jun14Operating rates (OR%) rose to 84% in the global chemical industry in April, according to data from the excellent American Chemistry Council (ACC) weekly report. As the chart shows:

  • This was back at January’s rate, after 83.6% in February and 83.7% in March (orange line)
  • But rates are still below the minimum 88% rates seen in the SuperCycle (red)
  • And they are a long way below the long-term average of 92% between 1987 – 2013

The key is the move into today’s New Normal of lower demand growth.  The blog has added a red line to the ACC graph, showing the lowest OR% seen during the SuperCycle. at around 88%.  Since 2009, OR% have never managed to reclaim this level, with the initial post-Crisis rally running out of steam in 2011.

Also interesting is that OR% growth was only up 1.3% in N America, despite the shale gas cost advantage.  This is yet further confirmation that lowest cost is now no longer the key driver for OR%.    Instead the highest growth was seen in China, up 11.1%.  This highlights China’s move into export markets, to replace slowing domestic demand, as the blog has identified in core products such as PVC and PTA.

The ACC also report that global chemical industry production is only up 14.6% today versus average 2007 levels, again confirming the lacklustre nature of the recovery despite the $33tn of policymaker stimulus.  April data shows that relatively strong areas included coatings, consumer products and pharmaceuticals, whilst inorganic chemicals, petrochemicals and plastic resins were weaker.

US specialty markets are seeing the same trends.  ACC data for April shows production up just 8.9% versus average 2007 levels, and again the market seems to be finding it difficult to gain momentum:

  • Total production was flat in April, with only 10 segments expanding compared to 23 in March
  • 17 segments actually saw declining production, with 1 segment flat
  • Adhesives & sealants and anti-oxidants remain the best performers, up around 10% versus 2013
  • Paper additives and plasticisers are the laggards, down around 5%

The data continues to highlight how GDP growth is no longer an accurate guide to future growth levels.  Companies who focus instead on age range and income level are likely to see the best results in future decades.


The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, down 5%. “Demand in the downstream polyester markets saw weaker sales, resulting in end-users being unable to pass down the additional cost to their customers”
Benzene, Europe, down 1%. “Rising crude prices led to higher global prices and a number of trades with short-covering said to be strong”
US$: yen, down 3%
Brent crude oil, up 1%
S&P 500 stock market index, up 6%
Naphtha Europe, up 6%. “Prices have spiked on a steep rise in upstream ICE Brent crude oil futures. Supply is less tight on a closed arbitrage window to Asia and increased imports from the US. Domestic gasoline blending demand is healthy, but this has been more than offset by slow petrochemical demanduted”
HDPE US export, up 7%. “Prices still slightly too high to really compete in the international market”