The blog is busy preparing its presentations for its World Aromatics and Derivatives Conference later this month, co-organised as always with ICIS. As well as looking at the impact of the transition to the New Normal, it will be investigating the current state of benzene markets. These are always an excellent leading indicator for the global economy, and the current position is particularly significant.
As the chart shows, there is normally little alignment between benzene prices (red) and major financial indices such as the Financial Times All-Share Index (FTA)). Both should move in line with their own supply/demand balances, and any parallels should be coincidental.
- There was very little correlation between 1980-2004
- Both markets did however see major volatility between 1986-90, after the 1985 collapse of oil prices
- But strong correlation then began to appear in 2004, and has since become a major feature of the landscape
What is behind this change? 10 years is clearly a long enough period to suggest that new drivers have appeared.
The key is perhaps that benzene markets have lost their major sources of on-purpose production. Instead supply now depends on developments in refining and oil markets, and doesn’t adjust with changes in demand levels. Shortages and surpluses have become more obvious and longer-lasting.
In turn, this development seems to provide a possible answer to the question. As the blog has discussed in the past, we are now seeing major correlation between oil prices and financial markets for the first time in history, due to the stimulus activities of central banks:
- In financial markets, they have funded a major buying surge, by providing unlimited and very cheap cash
- They have also created a panic amongst pension funds, due to their implied policy of weakening the US$
- As a result, many funds have now invested in oil, believing it has become a new asset class
- Equally, high-frequency trading in oil markets now dwarfs physical market volumes
Oil markets have thus lost their role of price discovery. And in turn, this has also impacted benzene markets. Neither are now trading in line with their own fundamentals of supply and demand. Instead, they are effectively being manipulated by short-term financial flows.
But these flows cannot continue forever, of course. What happens next is the question the blog will aim to answer in Brussels.
The weekly comments from ICIS pricing and price changes since January on the benchmark products in the blog’s Downturn Monitor portfolio are below:
Benzene Europe, green, down 21%. ”Spot values have drifted down by up to $100/tonne over the course of October”
PTA China, down 15%. “Large-scale shutdown in the downstream PET sector where average operating rates fell to 55% capacity because of poor demand amid a low season”
Brent crude oil, down 3%
Naphtha Europe, down 2%. “the arbitrage window to Asia has opened wide, prompting high-volume exports to the region and relieving oversupply”
HDPE USA export, up 16%. “Participants expect prices to fall in the next few weeks as producers begin to release more material into the export market”
US$: yen, orange, up 12%
S&P 500 stock market index, purple, up 20%