INSIGHT: Waiting for the fundamentals to catch up

23 September 2009 16:44  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Firm crude and naphtha could be the only factors setting a floor for petrochemical pricing in the fourth quarter and early 2010 as demand in China weakens, warned a senior executive with a major Asian producer this week.

“Margins will also get compressed by new start-ups looking for a home. More folks will get hurt in the process,” he said.

Provided there is no major disruption to crude production during this year’s US hurricane season - which runs from 1 June to 30 November - oil could be down to around $45/bbl by October, is one view.

West Texas Intermediate (WTI) for November delivery was at $71.22/bbl on Tuesday.

Storage space in some regions might be approaching full, prompting traders to lose their nerve and short the market, is an argument behind the fears over a collapse.

Nobody disagrees that confidence in futures markets is way out of sync with physical demand; oil and oil-product storage remain at or close to record-high levels.

“The high onshore and offshore inventories of middle distillates worldwide should handle the seasonal (northern hemisphere winter) pick-up in demand,” N Ravivenkatesh of oil and gas consultancy Purvin & Gertz  in Singapore said– illustrating just how out-of-kilter markets seem at first glance.

“This means there will be no need to raise refinery operating rates substantially in the fourth quarter.”

But he is beginning to wonder whether the sheer weight of financial speculation, and general economic confidence, will keep equity and commodity markets afloat until real demand for everything catches up.

“Perhaps the problem is we’ve looked too heavily at supply and demand from oil down to finished goods.

“I thought, like a lot of other people, that this would be a bubble; maybe not and so, maybe, we should look more at international capital flows in future,” Ravivenkatesh said.

 “If you look at the fundamentals, $20-30/bbl should be deducted from the current oil price because of speculation,” his Purvin & Gertz colleague, Victor Shum, added.

“But this is nothing new, of course. Since 2003 oil prices have moved in inverse proportion to inventory levels.”

His view, too, is that there could well be no dramatic collapse before the fundamentals catch up.

“We might even be entering a new period of price stability,” said the principal senior principal consultant, who is also based in Singapore.

“Physical tightness will return. This may have already been factored into pricing, meaning that there will be no repeat of crude well in excess of $100/bbl.”

Dated Brent and West Texas Intermediate (WTI) will trade at $65-70/bbl for the rest of year if there are no considerable hurricane disruptions, said the consultancy.

Its WTI forecast for 2010 is an average price of around $73/bbl.

East of Suez naphtha deficits for October will be slightly higher than Purvin & Gertz had predicted in August, Ravivenkatesh added in his September Asian Petrochemical Feedstock Market Outlook.

“Cracker operating rates are higher as a result of reduced ethylene exports from Iran due to cracker problems,” he said.

Both the Jam Petrochemical and Ayra Sasol crackers at Asssaluyeh in Iran have been shut down since late July.

This C2 tightness counteracted earlier downward pressure on Asian operating rates from increased Middle East polyolefin exports.

But he warned that new start-ups in the Middle East and China will cut capacity utilisation from November.

This downward pressure on naphtha will to some extent be compensated for by higher reformer operating rates in the Middle East and China.

The total Asian naphtha deficit is expected to be approximately 3.3m tonnes in September and 3.4m tonnes in October.

However, it is forecast to fall to 2.75m tonnes in November and 2.81m tonnes in December.

Here is some more good news: China’s Gross Domestic Product (GDP) might well be around 8% next year (2009 should see growth easily at this level) thanks to the government being able to maintain huge economic stimulus measures.

And on a much smaller level it’s possible that low Asian fluid catalytic cracker (FCC) operating rates could continue to support propylene prices.

FCCs have been running low on weak gasoline demand – another sign of the strange split between confidence and actual consumption.

But here is some bad news: Overall reformer margins will remain positive leading to high operating rates for the remainder of 2010, said Purvin & Gertz.

This is likely to squeeze cracker-based aromatics players.

Benzene, toluene and xylenes (BTX) reformer-based output is expected to increase during the fourth quarter as new plants start-up.

Greater coal-based C6 capacity in China is another threat.

But, it could still be a bubble.  Keep your fingers and toes crossed that everyone, including the oil traders, holds their nerves and so avoids a repeat of September 2008.

To discuss issues facing the chemical industry go to ICIS connect
Read John Richardson’s Asian Chemical Connections blog

By: John Richardson
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