The Barrel blog turned 10 years old on April 2, and to celebrate, we’re sharing special posts throughout the month. As a part of the celebrations, Joe Innace looks at two heavyweights of the commodities world — oil and steel benchmarks.
What better time to pit the pricing performances of oil and steel against each other than during the 10-year anniversary celebration of The Barrel?
In one corner, Platts Dated Brent was selected because it is the benchmark assessment of the price of physical light North Sea crude oil. The term “Dated Brent” refers to physical cargoes of crude oil in the North Sea with specific delivery dates.
In the other corner is US-made hot-rolled steel coil, aka US HRC. A bellwether sheet product, it hails from steel mills in the US Midwest and Southeast (EXW Indiana basis). This S&P Global Platts assessment serves as a benchmark for the US physical market, and also as an indicator of steel industry vitality worldwide.
These are two heavyweights in their own right, although they represent strikingly different markets and regions.
Let’s get ready to …
There really is no bout. Fact is, the two 10-year price series are more closely associated than at odds with each other.
Correlating more than 5,000 price data points since April 10, 2007 through April 10, 2017 for the two prices resulted in an average coefficient of 0.64 over the 10-year period. A value of +1 represents a perfect positive association, while a zero would indicate no association.
Why are the two values more friend than foe?
One reason: steel HRC is a feedstock for welded pipe and tube products consumed by the oil complex. A lot of tonnage is shipped to this energy segment.
This link is especially strong in the US because the country has become the swing producer of crude and shale gas in recent years.
The graph also illustrates some common trends, with both oil and steel sharing similar peaks and troughs.
For example, Dated Brent hit its decade peak of $143.51/b on July 11, 2008, while steel HRC in the US reached $1,075/st about two weeks later on July 28, 2008.
The two also shared the lows of the last 10 years.
Steel led the way down, bottoming at $365/st on November 30, 2015. Oil didn’t hit its 10-year low until January 20, 2016 when Dated Brent sunk to $25.99/b. These recent low marks were even lower than the lows charted in the aftermath of the global financial crisis for both commodities.
Interesting to note: Early in this 10-year cycle, oil led the way up or down and steel pricing lagged the pattern by two or three weeks. More recently, however, that has shifted and steel pricing has been setting the trend line.
Although the correlation and trends are largely positive, if anyone has the idea to price steel off oil, or oil off steel, the relationship is not strong enough to use one price as a proxy for the other.
Nonetheless, it’s a match worth watching.