Falling crude stalls Mideast petchem trades; eyes on OPEC

Focus article by Muhamad Fadhil

DUBAI (ICIS)–Slumping crude prices have been taking their toll on trading of petrochemicals in the Middle East, causing product values to tumble steadily and market players to become overly cautious, industry sources said on Friday.

Most market players are pinning their hopes on the upcoming OPEC meeting late this month to arrest the massive fall in crude prices.

“Hopefully, the OPEC member countries can stop this [crude oil price] decline with a firm decision,” a Saudi-based petrochemical producer said.

The oil cartel – which includes Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE and Venezuela – accounts for about a third of the world’s oil production.

At its 27 November meeting in Vienna, OPEC is expected to decide whether or not it will cut production given rising concerns over weakening global demand for crude in an oversupplied market.

Over the past three months, high density polyethylene (HDPE) film prices in the Middle East fell by 2.53%, while polypropylene (PP) flat yarn prices declined by 3.5% in the Gulf Cooperation Council (GCC) region, according to ICIS data.

The GCC region consists of the UAE, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait.

“There is still room for massive declines in the polymer market. We are seeing a lag between declines in the petchem and crude markets,” a Dubai-based PP trader said.

US crude prices had fallen by about 30% since their peak in June, when prices hovered at $110/bbl. At that time, concerns over possible oil shortages due to armed conflicts in Libya, Syria and Ukraine fuelled the oil price spike.

But prices came tumbling heavily in early October on concerns about slowing world economic growth, after the International Monetary Fund (IMF) cut its global GDP growth forecast to 3.3% for this year and to 3.8% in 2015.

At midday, US crude futures for January delivery were trading at $76.31/bbl, while Brent crude futures were quoted at $79.60/bbl.

“The bearish sentiment in the petrochemical market is caused by uncertainty in oil prices and poor downstream demand in China,” said a commodity trader based in Asia.

China, the world’s biggest emerging economy and a major market for petrochemicals, continued to show signs of slowing down.

HSBC’s flash purchasing managers index (PMI) for China in November stood at a six-month low of 50.0 – the threshold for expansion. The PMI is a barometer of activities in the manufacturing sector.

Petrochemical traders in Dubai are hoping OPEC would cut output to stabilise supply, and consequently, crude prices, although the group may face strong resistance from Saudi Arabia.

Saudi Arabia, being the world’s largest exporter of crude oil, can afford to cut its official selling prices for oil and refuse to cut production to keep its market share amid growing crude production in the US, industry sources said.

A sustained period of low oil prices could threaten the viability of US shale oil, a Dubai-based petrochemical trader said.

“Saudi is prepared to keep oil prices low to curb the shale oil revolution in the US,” the trader said.

US refiners need crude to remain around $70/bbl to break even, a source close to a Middle East producer said.

Nigeria and Venezuela, whose economies are considered most vulnerable to slumping crude prices among OPEC members, could spearhead calls to cut production to facilitate a price rebound in the coming months.

“The low oil prices are hitting economies such as Nigeria and Venezuela. The oil production costs of both countries  are high. They also need money to pay for huge infrastructure projects,” said a source close to a Middle East polymer producer.

Meanwhile, negotiations between Iran and the six world powers over the country’s nuclear programme are expected to be conducted late this month, and these could also influence the direction of crude prices, industry sources said.

It is hoped that a deal will be reached between Iran and the world powers, namely, the US, France, China, Russia, Germany and the UK, before the 24 November deadline – a year after a milestone agreement was struck to curb the Middle Eastern country’s nuclear programme in exchange for lifting of some sanctions.

International sanctions on Iran have tightened in recent years on suspicions that it is developing a nuclear weapon. In end-2011, the US tightened sanctions against Iran, while in July 2012, the EU banned trades of Iranian products.

Any further breakthroughs in Iran’s nuclear negotiations, however, may prove detrimental to the current oversupplied crude market, industry sources said.

Prior to the imposition of sanctions, Iran was the second largest producer in OPEC and the world’s fourth-largest oil producer with a crude output of around 3.5m bbl/day.

“Iran cannot come back into the crude market now. That would be disastrous,” a Middle East distributor said.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections