Can $125/bbl oil be passed on downstream?

A month ago, I suggested that oil prices ‘seem set to move higher in the short-term, with $125/bbl now being talked as a target’. Readers were hopefully not too surprised, therefore, to see prices for Brent and WTI close at this level on Friday night.

One of my longer-term forecasts also seems to be coming true. Back in October, I was a rather lonely voice when I suggested that the ‘consensus (chemical company) forecast is very optimistic…expecting oil will remain at $70/bbl, that debt market problems will be contained, and that petchem margins will remain at 2007 levels’. I feel most analysts have done the industry a major dis-service by continually suggesting that oil prices were somehow being inflated by speculative activity. This has blinded CEOs and business managers to what is really happening in oil markets. I was therefore very pleased to see last week that Rohm & Haas has decided that ‘enough is enough’. The company kindly sent me details of their ideas for changing the way that ‘raw material and energy costs are handled during these unprecedented, turbulent times’.

They say that ‘We can’t ask for, and implement, selling prices fast enough …and we can’t afford to continue to serve as a buffer between our suppliers and our customers and lose significant profitability in the process. This is an untenable position.’ As a result, R&H are introducing an ‘indexed raw material and energy surcharge’ from 15 May for all Specialty Materials products in most major geographical markets.

The aim is to enable prices to fluctuate in line with crude prices. Thus they will automatically reduce when prices fall. Of course, the critical test will be the response downstream. As R&H rightly say, it is too early to ‘speak to what customers will do’. One suspects that the answer will tell us a lot about the strength of underlying demand.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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One Response to Can $125/bbl oil be passed on downstream?

  1. Biofuelsimon 12 May, 2008 at 12:49 pm #

    It looks like an equitable plan to me, but as you say its success will depend on the strength of the market. It could be an early indicator of underlying demand.

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