By John Richardson
YESTERDAY’S fractious OPEC meeting - where members were unable to agree on a proposal by the four biggest members to raise output – may not necessarily be good news for petrochemicals.
For a long time the industry has worried about Saudi Arabia’s potential to raise crude output from approximately 8.5m barrels a day - where it had been for much of last year and into 2011 - thereby generating more associated gas feedstock.
As we have blogged on before, Saudi crackers need crude production to be at around 10m barrels a day in order to received sufficient associated gas to run at 100%.
In the first quarter of this year, the crackers remained at average operating rates of around only 85%. This had taken approximately 1m tonne/year of ethylene production out of the market.
This has provided some support for troubled ethylene derivatives markets, particularly polyethylene (PE). Chinese PE and polypropylene (PP) pricing has been flat or declining for the last five months due to problems with the economy. In Europe now also, pricing is on the decline, partly on the back of what’s happening in China.
The OPEC meeting in Vienna saw a rejection of a proposal by the four bigger producers – Saudi Arabia, Kuwait, Qatar and the United Arab Emirates – to raise crude output by 1.5m barrels a day.
But, according to this Reuters report, Saudi Arabia, the world’s most-important “swing producer”, has already unilaterally raised output by about by 500,000 barrels a day in June to between 9.5m barrels to 9.7m barrels a day. Saudi’s apparent motive for upping output is its concern over the impact of high prices on the global economy.
An increase of 500,000 barrels a day for June would mean that Saudi Arabia was already above well above 8.5m barrels a day of production in May. This means that they could already be running crackers at more than 85%, helping to explain reports of inventory problems among Saudi polyolefin producers.
The China market is just too weak at the moment to take any extra volumes. Hence, perhaps, the reason for the aggressive reductions in Middle East low-density polyethylene (LDPE) offers in Asia and linear low-density PE (LLDPE) offers in Europe.
It might not seem logical that Saudi Arabia raised output simply because it had more associated gas available to run harder.
But traditionally, crackers in the Middle East have always run flat out if they have had the required feedstock, regardless of market conditiions – as they can always make money no matter how bad things are.
The same could have well have happened on this occasion, especially if the Saudis accepted the conventional wisdom that China was about to come roaring back with strong orders.
PetroMatrix, the Swiss-based oil-research service, has produced this chart which actually indicates a steep rise in Saudi oil production since January.
Click here to View image
We had heard of a pick-up in Saudi output in March to help deal with the Libyan crisis. But we were then told that the Kingdom quickly cut back again when it found that it couldn’t sell its extra production of mainly sour crude (Libyan crude is light and sweet and therefore the only option for many of the older refiners).
Now it seems as if bigger-picture concerns over the impact on the global economy of expensive crude has prompted a rethink.
Whatever the reality in Saudi Arabia, the OPEC decision not to raise its official quota is bad news for the battle against inflation - as the immediate response has been rise in oil prices.