INSIGHT: Lower oil price hits major petchems but stimulates demand

Nigel Davis

28-Nov-2014

By Nigel Davis

LONDON (ICIS)–Naphtha was down sharply in Europe on Thursday following the decision by OPEC not to cut oil production and the instant negative reaction on the oil markets. But the Europe December ethylene contract was agreed down just €50/tonne on Friday morning, once perhaps the dust had settled. December propylene was agreed down €60/tonne.

Chemical markets are reacting to lower crude (spot olefins prices are lower) but the immediacy of the impact is likely to be lost in contract-driven regions and particularly those, like Europe, characterised by a lacklustre downstream and relatively balanced supply and demand.

The pressure is downwards and there have been significant price falls in the second half of this year. But producers will battle to hold on to margin as they see costs easing.

Buying interest is likely to be limited in the run-up to the turn of the calendar year and the extended holiday period in large parts of the world. In Europe inventories are low and buying remains very much hand to mouth.

No producer would wish for a combination of lower prices and reduced demand and this degree of oil price uncertainty.

Lower polyolefins demand growth in the important China market, for instance, is of concern to exporters in the Middle East and elsewhere and is clearly having an impact worldwide. But in some markets supply and demand remain relatively tight and lower-cost crude appears to be stimulating market growth.

In the US the big chemicals markets are tight and while the price dynamic is largely driven by oil cracker costs are driven by the price of natural gas. In that market the question of how lower crude prices affect continued shale gas exploration and, crucially, the production of natural gas liquids (NGLs) and the over-production of ethane, is vitally important.

The question of how important supply/demand fundamentals are in determining the oil price compared to monetary policy will continue to rage. No one has the answer to that, although many have an opinion.

Prices in the more dynamic chemical markets in Asia dropped on Friday. An indicator of sentiment was the close to 4.0% fall in LLDPE futures on the Dalian commodities exchange in China.

In other markets we are seeing the push back, or, rather, the reluctance of sellers to follow low bids.

In polyester, for instance, China’s monoethylene glycol (MEG) and purified terephthalic acid (PTA) futures markets are down. But sellers say that MEG fundamentals are still good and that they expect the market to revert to a more stable state once the effect of falling crude prices has passed.

It could be argued that, as opposed to oil, chemicals markets are driven more by supply and demand fundamentals and less by sentiment. This is a function of the relatively limited number of buyers and sellers in some products and the lack of active chemicals futures trading in most regions.

We have a curious but perhaps not atypical situation in Europe currently.

Cracker operators are rushing to snap up naphtha cargoes before prices rise again. The weak euro has also this year stimulated export growth. The lower crude price seems to be driving downstream demand. Europe’s crackers are said to be running flat out.

Read Paul Hodges’ Chemicals and the Economy blog
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