Correlation

In my earlier post “Supply and Demand”, I mentioned that “the oil prices will continue to rise in 2011 and possibly reach an average of $100 a barrel this year.” Today, oil surges again in the course of Libyan violence. Brent crude reached $114.13 while WTI crude goes over $100.75 a barrel.

Currently, there is a huge gap between Brent and WTI crude price. Historical evidence proved that two crude oil benchmarks will eventually come to an intersection - whether it’s Brent crude to go down or WTI crude to go up. One way or another, oil price will eventually starts to decline as researchers are dedicating themselves to search for improved alternative energy sources. But more to the point is how long does it going to take?

Now, from July, 2010 @ $84.15 to Jan, 2011 @ $178.93, the average price of Upland cotton per pound has landed an increased of $94.78 or 112.63%.

Let’s take a look at Spot Caprolactam price. From July, 2010 @ $2,500 per ton to February, 2011 @ $3580 per ton, CPL netted an overall increase of $1080 or 70%.

The correlation between CPL and oil is apparent, but what about cotton and CPL?

A simple logic would be the cotton price comes in way too high and people start to seek for alternatives. A simultaneous increase in demand and decrease in supply, the price of synthetic will be increased. So, we are actually looking at a price module where cotton price will start to decrease at the cost of synthetic price to increase.

Nonetheless, it sucks to bring the bad news on the price front. But the fact is that the market got so used to stable or decline textile raw material prices for so many years. Now, it is imperative to understand why the price of synthetic fiber is going upwards.