It is tempting to think that oil price volatility is a zero-sum game. For every 'winner', one would expect there to be a 'loser'. But when it comes to downstream industries like chemicals, the answer is more complicated, as Richard Bartlett, BP's commercial director for aromatics in EMEA, discussed at Novapet's customer event recently in relation to paraxylene.
Building on Richard's insight, the chart above shows weekly Brent oil prices (blue line) on the left-hand scale, and US polyethylene export prices (red) on the right hand scale from January 2011:
• Oil prices rose 32% to end-April 2011; then fell 18% to year-end; rose 19% to March 2012; fell 25% to July; and have since risen 24%
• This is a lot of volatility for consumers to manage
• HDPE prices also rose 33% to end-April; then fell 28%; rose 29%; fell 24%; and then rose 25%
This major volatility was clearly difficult to pass down the value chain. As prices rose, buyers were forced to rush into the market to protect their margins. Many companies set their prices on a 6 month or annual basis, and cannot raise them if oil prices rise suddenly.
This would be bad enough. But oil prices in 2011 were at a record $111/bbl, meaning that the working capital required to hold inventory was very high. CFOs were understandably worried about tying up their cash in this way. Banks are not keen to lend. And there is also the memory of 2008's price crash, which took some companies close to bankruptcy.
Thus high prices were followed by major declines, as consumers destocked down the value chain. H2 2011 saw them fall 28%, versus an 18% fall in Brent. This was no doubt due to year-end needs to minimise working capital, as well as general nervousness. In turn, this then led to panic buying in Q1 2012, with prices up 29% as Brent prices rose 19%.
However fatigue from this volatility has seen Brent and HDPE mirror each other since then: down ~25% to July, and then up ~25% again. It will be interesting to see if any Brent rise/fall in Q4 continues this trend. Or will CFOs again have to cut back for year-end reasons?
Whatever the next phase brings, producers and consumers have been the clear losers from all this volatility. Operating rates have see-sawed around for no reason - adding major cost for everyone. There has never been any shortage to push prices higher on a fundamental basis.