There are some signs of a recovery in some markets, but the overall picture is still very quiet for what should be the seasonally strongest quarter of the year for the West. Markets should also have been strong in Asia, in the run-up to this week’s Lunar New Year (LNY), but they have remained relatively quiet.
Yet the relatively mild winter should have caused demand to surprise on the upside. Equally, one would normally expect to see growing confidence about the outlook for March, with the return of China after LNY, and ahead of Easter in the West.
One key issue is that falling oil prices reduce visibility into the real state of demand, just as happens with rising prices:
- When oil prices rise, we are fooled into thinking everything is wonderful, as buyers rush to build inventory ahead of price increases
- The opposite happens when they are falling, as buyers give up trying to ‘catch a falling knife’, and only order on a hand-to mouth basis
So in many ways we are at a cross-roads. Demand appears weaker than it should be, given the time of year. But it is unclear how much of this is due to a running down of inventories, and how much is due to weak underlying demand.
Equally complex is the near-term position on the impact of falling oil prices. Over time, it should be positive, as lower energy costs should leave the consumer with more discretionary spending power.
But in the short-term, there can be a bigger hit to demand – ‘losers’ from lower prices tend to stop spending very quickly, whilst ‘winners’ tend to wait to see if the situation continues, before committing to major new spend.
In place of visibility, we instead have volatility:
- The recent 20% jump in oil prices has caused some buyers to panic, as they had let stocks get too low
- In turn, this has encouraged sellers to take a firm line on volumes, in order to support margins
- But we do not know if this temporary upturn will turn into something more sustainable
The chart of benchmark products above confirms this general picture. Most of the products have stabilised, at least temporarily. US polyethylene prices are still falling, but this is really catch-up. Production outages in Q4 meant the US was largely insulated from the need to export as oil prices tumbled. As ICIS pricing notes:
“Long-term, ethylene prices remain depressed because global oil markets have mitigated much of the US cost advantage on derivatives. As a result, downstream units are running at lower rates because they cannot export products, lowering demand in the US. US ethylene buyers are also showing renewed concerns that a floor in global oil and downstream markets has yet to be found after another downturn in crude.”
This also highlights the key unknown, namely the outlook for oil prices. Those who staged the SuperBowl coup 2 weeks ago ago have clearly not given up. They have so far managed to create price rallies even though the underlying picture on supply/demand gets worse.
This of course, creates added risk for everyone else. We are now heading into a seasonally weak period for oil demand as refineries go down for post-winter maintenance. And despite the hype over the declining numbers of drilling rigs, there are still few signs of any real cutbacks in supply from oil producers.
Benzene Europe, down 60%. “Healthy cracker margins were supporting output throughout January, leading to a surplus of pygas and benzene in Europe.”
Brent crude oil, down 44%
PTA China, down 42%. ”Demand in the key China markets started to slowdown ahead of the Chinese Lunar New Year holiday”
Naphtha Europe, down 41%. “Market fundamentals are marginally less strong when compared with last week.”
¥:$, down 16%
HDPE US export, down 26%. “Prices saw some softening and a widening of ranges on lower ethylene prices and slow demand for the week”
S&P 500 stock market index, up 7%