Europe chems spooked by threat of $100/bbl crude

21 November 2007 16:50 [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--European chemicals markets were spooked on Wednesday as oil neared the psychologically important $100/bbl barrier, worrying over already tight margins and their ability to pass on the higher energy and feedstock costs.

Crude futures had risen sharply on fears of the state of the US economy and the continued weakness of the dollar but prices remained shy of the $100/bbl barrier following the release of mixed US crude stocks data and ahead of the Thanksgiving holiday.

Stock market weakness helped temper the crude rise. January NYMEX crude was trading at $98.26 at 15:45 GMT.

Chemicals producers expected a further squeeze on gross margins and on profitability which have been hard hit since crude and feedstock naphtha resumed their meteoric increase in October.

“Oil breaking $100/bbl is a major psychological barrier,” said one major olefins producer.

“Cracker margins were already very low, even taking into account the weak US dollar. I believe many hedge funds have bought on the basis that this will happen and if people cash in it is possible prices could drop," he said.

“However, the fundamental support lines are there and I think prices could continue to rise.”

The European naphtha market reached another new record high trade on Tuesday, with a 12,500 tonne cargo sold for $837/tonne (€566/tonne) CIF (cost, insurance and freight) NWE (northwest Europe) topping the previous record of $828/tonne.

The high cost of oil and naphtha is a main talking point in the December-January ethylene bi-monthly contract. One producer already said that a €100/tonne increase would be needed to offset the impact of high costs in the fourth quarter.

Combined ethylene and high density polyethylene (HDPE) margins have nearly halved in the past three months, according to ICIS analysis. While HDPE prices have weakened slightly since the middle of October, much of the decline in margins has been due to higher naphtha feedstock costs.

Higher crude was expected to feed through particularly in to higher prices for lubricants. Gas prices were likely to move higher on the back of oil impacting methanol and other gas-fed markets.

However, European aromatics buyers and sellers were yet to see any reaction to crude’s upturn, with many players commenting that current crude values were doing little more than to sustain existing pricing rather than to improve it.

Weak buying sentiment against values considered by buyers to be overinflated were the balancing factors.

“At the moment the low dollar is compensating for the high oil price, but high oil will push up gas-oil and this is the indicator for slack wax,” a European candle maker said.

If crude prices remained at today’s levels, slack wax prices were likely to lift more or less immediately, he said, while there would be a time-lag before they hit paraffin wax.

Slack wax availability would tighten as refineries could start using it as an alternative energy source to gas-oil. “Gas-oil is up to around $813/tonne - it should be around $400/tonne,” he added.

($1 = €0.68)

Ed Cox, Peter Salisbury and Caroline Howard contributed to this article

By: Nigel Davis
+44 20 8652 3214

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