Record high oil prices hit demand

D'turn 7Jan12.pngThe blog is quite surprised at the mainstream media’s lack of interest in the fact that average Brent oil prices were at record levels in 2011 in real terms (adjusted for inflation).

The annual average of Brent prices recorded by the US Energy Information Administration was $111.26/bbl, well above even 2008, when Brent prices peaked near $150/bbl in nominal terms. Yet a Google search of ‘record annual oil prices in 2011′ reveals only the blog’s own entry.

The statistic itself certainly seems newsworthy and important. 2011’s high oil prices took 5% of global GDP from consumers’ pockets. By comparison, oil costs averaged less than 3% during the economic SuperCycle years of 1982-2007. It is no wonder that spending is reduced, and retailers around the world are facing hard times.

However, the blog suspects this lack of awareness is about to change, as its impact becomes clearer:

Tesco, the world’s 3rd largest retailer has reportedly had its worst UK Christmas performance for decades
Nigeria is about to see major strikes over fuel subsidies
• Refiner Petroplus has seen its credit lines frozen, and has already been forced to shut 3 of its refineries.

Petchem markets are caught in the middle, as usual.

Producers have no choice but to try and protect margins by posting higher prices – especially with crude now rising further due to worries over Iran’s policies. But buyers find it extremely difficult to pass through any increases to cash-strapped consumers.

In addition, economic concerns have helped make markets treacherous:

• Inventories are low due to demand worries, and cash constraints
• Mid-tier companies are finding credit tight, as the banking sector cuts back (especially in China and Europe)
• Crude oil markets remain supply-driven and unpredictable
• Currencies are very volatile, with the €:$ rate down 3% during the week

The chart shows product price changes since the IeC Downturn Monitor’s launch on 29 April 2011, with ICIS pricing comments below:

HDPE USA export (purple), down 18%. “Trading was thin, with very little interest in US material”.
PTA China (red), down 14%. “Surging feedstock PX prices exerted major upward pressure on PTA prices”.
Naphtha Europe (brown dash), down 14%. “Petchems and gasoline have shown minimal interest in naphtha”.
Benzene NWE (green), down 13%. “Downstream demand had yet to pick up following the holiday season”.
Brent crude oil (blue dash), down 10%
S&P 500 Index (pink dot), down 6%

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