INSIGHT: Crude reaching beyond $100/bbl

27 February 2008 16:50  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--In late November 2007 and again at the turn of the year, news of the leap of oil close to and above the $100/bbl mark rushed around the word. Markets grumbled and players in most commodity oriented businesses in chemicals got the jitters.

But now, more than two months later, crude breaking through $100/bbl raises hardly an eyebrow. The likelihood of higher sustained prices passes with few remarks.

To some extent this is because markets like those for many of the world’s most widely traded chemicals have become used to oil and energy price volatility.

There is also much wider acceptance of the seeming inevitability that high oil and commodity prices are here to stay.

As far as oil is concerned, high prices will be sustained by now deep-seated concerns about peak oil. The oil markets have also received a loud signal that OPEC next week won’t announce an increase in production.

At this time of the year, it should be different with the prospect at least of warmer weather in the US heralding the period when refineries come down for maintenance and oil stocks build. But global demand just keeps rising.

There is an element of speculation in the $100/bbl plus numbers - and in the rising prices of other commodities - but the fundamentals under-pinning the oil price rise this time are stronger.

Look to China and India and those countries’ thirst for gasoline and other oil-based products for some explanation at least of the latest push higher. US oil stocks are important but what about on-going demand from the world’s emerging power-house economies.

Some of the latest increase – crude futures rose to new record highs on Wednesday in Asia with NYMEX light sweet crude hitting $101.89/bbl, up over $1/bbl, and ICE Brent futures climbing to $100.30/bbl – is driven by the on-going weakness of the US dollar.

But remember, not too long ago, the idea was that a sharp US slowdown would drive oil consumption and the oil price down. Now, it looks as though that is not the case. Indeed, it appears that Asia is the driver in more senses than one.

On the oil price front this is hardly good news for the chemicals producer, no matter where he or she sits.

Chemicals production is hit hard by higher priced oil-based feedstocks in Europe and, particularly, in Asia. In North America since the middle of last year the price of feedstock ethane has tracked oil much more closely than it has natural gas.

And don’t forget all important energy costs that are pushed higher as the oil price climbs. The additional charges for the upstream players are particularly significant.

The chemicals sector has ridden a wave of strong demand and tight supply for what increasingly seems like too long. Slower demand growth and the ever higher price of crude signal difficult times ahead.

The mountain of ethylene and polyolefins capacity on the horizon also bodes ill for a sector which has generated strong cash flows for an unexpectedly extended period.

The sector is coming off its peak but cannot expect any respite from lower priced only a further squeeze on gross margins and on profitability.

Despite the seeming resignation to the inevitable, $100/bbl oil is still a significant barrier.

For further disucssion on the driving forces behind the oil price read Paul Hodges Chemicals & the Economy blog on ICIS.

By: Nigel Davis
+44 20 8652 3214

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