Q1 was very difficult for many companies and investors. They had wanted to believe since 2009 that central banks could somehow control the global economy:
- The oil price would always be $100/bbl
- The US $ would always remain weak
- Central banks would always be able to stimulate growth in the economy
- Stock markets would always go up in the US and other major economies
But instead, volatility increased quite dramatically. The chart above of Brent oil prices and the US $ Index since the Great Unwinding of central bank policies began in mid-August highlights the issue:
- Brent oil averaged $57/bbl in the first week of January, and $56/bbl last week (blue line)
- Yet prices fell 14% within the quarter, and rose 25%, as pricing volatility returned to the markets with a vengeance
- In currency markets, the $ gained 6% over the quarter against the world’s major currencies (red)
- This was an astonishing move, which hit trade flows, debt markets, company profits and national economies
- Its volatility also rose: it was up by 10% in mid-March, before falling 4% in just 3 weeks
It is thus becoming clearer with every day that passes that central bank policies are simply wishful thinking.
Companies also have their own self-inflicted wounds to deal with. As I discussed last week, too many failed to spot the oil price fall in H2 last year, and only reacted in January. They thus destocked at exactly the wrong moment – just before the brilliantly successful ‘SuperBowl coup’ pushed oil prices up 22%.
Since then, they have been seeking to rebuild inventory as we enter the seasonally strongest-demand period of the year. This has caused price rises in some most unlikely areas – China’s PTA markets, for example. Genuine shortages are also now occurring in some markets, such as European polyethylene and polypropylene.
The lesson of the period since August is that volatility is on the rise. Companies who wish to survive must therefore follow the time-tested motto of the Scouts – “Be Prepared”. They need to ignore consensus views, and instead develop robust Scenarios against which to test out their strategies.
Slowly but surely, the economic impact of today’s ageing global population is now moving us kicking and screaming into the world of the New Normal.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 50%. “The market was quiet ahead of the monthly contract settlement”
Brent crude oil, down 46%
Naphtha Europe, down 42%. “Olefins and polyolefins markets are relatively tight in Europe.”
PTA China, down 40%. “Majority of market participants were concern that high stockpiles might result in a drastic decline in prices in the near term, especially with the settlement for physical delivery of PTA futures cargoes coming in May.”
HDPE US export, down 23%. “US export prices remained unchanged this week”
¥:$, down 17%
S&P 500 stock market index, up 6%