Last year’s ‘Chart of the Year’ was headlined “China’s auto sales bubble begins to burst“. Few would disagree with this view today. Similarly, there is little doubt about 2015′s Chart of the Year. It has been the focus of industry and analyst attention all year:
- Those who believed that argument that the world faces an energy supply glut have used it to argue that WTI oil and US natural gas prices were now realigning again
- Those who decided to invest $150bn of petrochemical industry capital in new gas-based production, or $1.2tn of their investors’ money in new US energy production, have watched with mounting horror
It shows WTI prices divided by 6 (blue line) to equate to oil’s energy equivalent value versus natural gas (red). And it highlights oil’s roller-coaster ride since 2009. Contrary to all logic, oil prices surged from 2009 – 2013, ending far about their relative value versus natgas:
- But since 2009, there has never been any risk of a shortage of oil, despite the constant analyst forecasts that this was “just around the corner”
- The higher prices were instead due to financial players seeking a ‘store of value‘ for US$-based assets, in response to their belief that the US Federal Reserve’s easy money policy would devalue the US$
- Even China’s stimulus policy failed to create shortages, although it supported the wishful thinking that oil demand was set for long-term increase
But then reality began to return, as the Great Unwinding of stimulus policy began to have its effect from August 2014.
In a perfect world, prices would have simply returned very quickly to their natural level in relation to natural gas. But as I warned a year ago, it has been a very bumpy road:
- The problem is that central banks have been destroying markets’ primary role – of price discovery – for 15 years: first with the subprime bubble, and then with Quantitative Easing
- And so anyone who began work within the past 15 years, has only known a world where market forces could be overwhelmed by central bank stimulus.
This is why the chart of WTI prices versus US natgas prices is so important. It reminds us there is is a real world out there, where consumers will not continue to pay more for oil than its relative energy value. And the oil price downturn since August 2014 also reminds us a new era is likely dawning in energy supply itself.
US WTI prices were only decontrolled in 1981 under President Reagan, having previously been set by the Texas Railroad Commission (whose system of “prorating” provided the basis for OPEC’s operation). Now it seems OPEC’s role is following the Railroad Commission into history. Saudi Arabia and the GCC countries have recognised this for some time – and it will likely become more apparent to others in 2016 as we move into the New Normal world.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 65%
Naphtha Europe, down 55%. “OPEC’s new Oil Product Outlook suggests naphtha with be the fastest growing oil product with an average growth of 1.3% per year between 2014 and 2040”
Benzene Europe, down 58%. “The key global development for benzene supply is the new capacity coming online in both India and the Middle East”
PTA China, down 44%. “Chinese demand for polyester end-products and PTA is likely to remain bearish.”
HDPE US export, down 37%. “Ample supplies with little trading activity”
¥:$, down 18%
S&P 500 stock market index, up 5