INSIGHT: US ethylene set to peak in May on pipeline restart

17 April 2014 14:00  [Source: ICIS news]

By John Dietrich

HOUSTON (ICIS)--In the expected tug-of-war between Texas and Louisiana spot ethylene prices, Texas is expected to win.

“I would expect that Texas will climb 2 cents/lb and Louisiana will fall 13 cents/lb, or possibly 3 cents/lb and 12 cents/lb,” an ethylene buyer said. “Then things should get back to normal.”

The buyer was referring to the gap between ethylene in Texas and Louisiana, which has reached a premium of 15-18 cents/lb ($331-397/tonne) in favour of Louisiana material.

The rise in Texas ethylene prices has started to hit, with spot transactions trading 2-3 cents/lb higher as news hit the market of the expected restart in May of the Evangeline Pipeline.

The pipeline has been down since the third quarter of 2013, and has experienced several delays in its restart.

Before news hit the market of the expected May restart, sources had talked at the end of March that the pipeline would be back in mid-April or late-April.

The ongoing shutdown has left several ethylene producers in Texas unable to move material to their preferred downstream destinations in Louisiana.

Sources said the differential between the two regions has started to narrow already, with Louisiana buyers holding out with current inventories and Texas buyers loading up.

In mid-April, sources said offer levels for Louisiana-based Choctaw System ethylene had fallen to 64 cents/lb from 72 cents/lb within a week.

The offer levels were also below the previous reported trade on the Choctaw System, which was done at 66.5 cents/lb on 18 March.

“It seems someone is confident that the pipeline will be back soon,” another ethylene buyer said. “Either that or someone is just throwing out a number.”

In Texas, expectations of a May pipeline restart not only pushed up pricing, but also lead to a surge in trading activity.

Sources reported 11 trades for front-month ethylene during the week ended 11 April, with another five trades for future-month ethylene also reported.

The market was mixed regarding who was doing the buying, with some saying consumers were securing material to move on the pipeline immediately.

“There some people out there who haven’t bought in at least a month,” a source said. “They’re back in the market.”

Others said traders were likely buying up material in an effort to have stocks to sell to consumers in Louisiana.

Sources said that if the pipeline restart is delayed into the second half of the year, it will be outweighed by several cracker expansions coming on line.

“There’s 3 million pounds per day of extra capacity starting up in June,” a source said. “That should push the differential back down to the historical level of 1 cent/lb.”

The expanded capacity is expected by some to push spot ethylene prices down into the high-40s cents/lb level heading into the US hurricane season.

Sources added that if there isn’t much capacity lost during hurricane season, spot ethylene could end the year in the low-40s cents/lb level.

However, the downward pressure on ethylene prices could be slightly eased by higher feedstock ethane costs.

The additional capacity is expected to lead to more ethane demand, which will likely lead to higher prices in the market.

Higher ethane and lower ethylene could lead to some decline in ethylene margins, although sources said they expect margins to remain well above the 30 cent/lb level.

“I don’t know how long it will take, but prices will come back to normal,” a buyer said. “Then again, after all this, what’s considered normal?”

By: John Dietrich

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