At the Gates of Transparency - NYMEX Resin Contracts
Vol. 1, Issue 02 We all know the price of crude oil, gasoline and natural gas because of the hourly bulletins about the latest trades of these products on the New York Mercantile Exchange. In July the ethylene and polyethylene markets joined the ranks of products traded on the NYMEX.
While not trading in large volumes, these burgeoning markets are now at the precipice of a new plateau of maturity, and on the verge of creating fuller transparency. To be able to trade them at all, companies have been registering credit accounts with the exchange, creating trading strategies and now are beginning to execute them.
Interestingly, these beginning trades are for the forward markets. Typically, ethylene and polyethylene trade regularly for material to be delivered this month or next, known in trading parlance as “one to two months out.” The trades taking place in these new contracts are for delivery in 2010. While the volumes are not large, the fact is that positions have been taken on the exchange that will require delivery of material in 2010 at a price that has already been determined. This has created another indicator for these markets: a forward curve can now be determined, and transparency is enhanced.
Prior to the polyethylene trades on the NYMEX, many in the PE market had assumed that the commodity’s forward curve resembled the better-defined ethylene curve. The ethylene curve, which has been openly discussed for several months by the trading community, has been in a contango shape, much like crude oil. A contango trend is one in which the price of commodity today, or in the “front month” is lower than in future months. A contango curve implies that the weakest prices in the market are the current ones.
Ethylene has been in a contango shape for several months. Currently, the contango is not wide, but the cumulative deltas show that ethylene price ideas for one year from now are a full 4 cents above this month’s pricing.
When polyethylene began trading, it was immediately clear that price ideas for the fourth quarter of 2009 and also the first quarter of 2010 were lower than price ideas for July of 2009. This was a startling realization for many in the market. This trend has prevailed for at least several weeks, and risks have already been taken based on this trend. While the July 2009 spot market has been priced at nearly 50 cents per pound, forward markets are closer to 45 cents per pound. This is a tremendous opportunity for parties willing to also take on positions in the upstream ethylene and ethane markets. Buying PE at a lower price than today’s levels and being able to sell ethylene or ethane at a higher price than today’s levels is one example of a position that takes advantage of both trends.
At the same time, the new contracts have evoked some controversy. Traditional buyers and sellers have posited that trading a futures contract has no purpose beyond setting a price, and that value of the true cash market lies with the railcars being bought, sold and delivered. This is an argument that is stridently voiced in the oil markets as well, and the controversy evoked there has inspired the CFTC to consider placing limitations on speculative trading.
As more volume trades on the futures exchanges, the active bids and offers for ethylene and polyethylene become better known. For better or for worse, price ideas are becoming widely known for markets stretching out more than a year. With low liquidity, it is of course easier to push a price position that may not reflect the reality of the masses in any given market.
In the end, the validity of what we’re seeing now will be borne out if liquidity increases. If that occurs, the quality of information will improve, and the polyethylene markets can function more efficiently than ever before creating genuine transparency. This is a legendary time for the ethylene and polyethylene markets, and the world is watching.
For more podcasts in this Transparency series click here.
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Copyright 2009