FocusCrude at $71/bbl buoys Asia petchems, sustainability doubted

04 August 2009 06:43  [Source: ICIS news]

By Pearl Bantillo

SINGAPORE (ICIS news)--Optimism over global recovery has kept crude prices above $71/bbl (€49/bbl) on Tuesday after heavy gains overnight, but with bubbles forming in economies injected with too much liquidity it may be difficult to sustain the price gains, analysts said.

Equities markets rallied on Monday following encouraging manufacturing data from the world’s two biggest economies – the US and China - and sent NYMEX light sweet crude soaring $2.13/bbl to the closing level of $71.58/bbl overnight.

Crude eased slightly on Tuesday with expectations that data to be released later on Tuesday will show a build in US crude inventory.

“It remains at very strong levels. It’s more [because of] anticipation of international economic recovery,” said David Moore, chief commodity strategist at Commonwealth Bank of Australia (CBA).

The positive sentiment seeped through petrochemicals trading, with some products registering price uptrend.

Benzene cargoes for September delivery were trading at $40/tonne higher at $880-$890/tonne FOB (free on board) Korea on Tuesday morning, while toluene prices firmed up $20/tonne to $780-790/tonne FOB Korea for any September loading.

Spot paraxylene offers in Asia for delivery next month remained at high levels at around $1,150/tonne CFR (cost and freight) Taiwan, supported by expectations of tight supply and strong demand from buoyant upstream purified terephthalic acid (PTA) market.

“The fundamentals point to higher PX prices to begin with. With crude oil prices also rising, we are bullish,” said a Singapore-based trader with a Chinese-owned firm.

Styrene monomer prices were also tracking the general trend of crude, rising more than $50/tonne this week to above $1,100/tonne FOB Korea, said a Korean trader.

“SM prices would likely extend gains this week as sentiment had been boosted by firm energy prices,” said a broker.

Some petrochemical players, meanwhile, were wary of the volatile crude that makes business planning difficult.

 “Our raw material requirements are determined by the orders we receive from our customers and our forecast of orders for the coming months. We don’t buy more raw material just because crude prices rise,” an European plastic garbage bag maker said.

 “Crude prices are too volatile, our purchasing plans cannot be based on that,” he added.

A South Korean producer said it would target to raise its linear low density polyethylene (LLDPE) price above $1,300/tonne CFR (cost and freight) China for September shipment, over $40/tonne above its August sales, if crude prices hovered between $70-75/bbl in the coming weeks.

Oil price movement would heavily depend on the release of data from the International Energy Agency (IEA) on crude stocks later today [Tuesday] and the US jobs data due out this week, said CBA’s Moore.

There is a strong chance that oil prices would fall again in the next few months, depending on the actual state of the global economy that gauges energy demand, he said.

 “At the moment, the flood of liquidity and signs that things are not as bad as in the past six months were enough to lend to the market some support,” said Song Seng Wun, Singapore-based regional economist at Malaysian brokerage CIMB-GK Research.

It would be wise not to be too carried away by the tide of optimism, analysts said. The equities markets rally has flagged concerns that liquidity may be being used for speculative purposes and was not flowing to the productive sectors of the economy, they said.

“There are bubbles everywhere, as far as property market is concerned,” CIMB-GK’s Song said, citing conditions in China, Malaysia, Vietnam and Singapore following heavy government economic pump-priming.

“We may have correction in oil prices from here. High oil prices may have a dampening impact on some developed economies,” said Moore.

Crude price spikes could derail recovery as it raises the spectre of inflation uptrend - a most unwelcome condition thinkable in periods of economic distress, analysts said.

“Inflation is the main risk over the horizon. We are not seeing significant improvement in labor market conditions so you see price pressures going up from high commodity prices, supply disruption and speculation that could dent or cap consumer confidence,” said Song.

While manufacturing indicators point to easing down of recessionary conditions, unemployment rate continues to rise to multi-year highs in countries like Japan, tempering hopes of a sustainable and broad-based economic recovery, analysts said.

Japan’s unemployment rate was at a six-year high of 5.4% in June, keeping a lid on consumption.

“Unemployment is lagging the turnaround in production,” said David Cohen, Singapore-based regional economist at research firm Action Economics.

“There will still be some concerns out there about headwinds,” he added.

“We will have to wait and see until such time the optimism in recovery can actually be substantiated,” said CIMB-GK’s Song.

($1 = €0.69)

With additional reporting from Salmon Aidan Lee, Clive Ong, Chow Bee Lin, Ong Sheau Ling

To discuss issues facing the chemical industry go to ICIS connect

By: Pearl Bantillo
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