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Costly Oil Hurts US Industry

Business, Company Strategy, Economics, Olefins, US
By John Richardson on 18-Apr-2012


By John Richardson 

THE higher that oil prices go the more the US petrochemical industry’s margins have expanded.

Petrochemical prices are oil-driven and, therefore, have to go higher as crude becomes more expensive, whereas the cost of shale gas-based ethane keeps on falling due to rising supply. US petrochemical producers are cracking increasing amounts of ethane.

A further benefit for the US is that its overseas naphtha-based competitors are being forced to cut operating rates as their margins are, in contrast, being squeezed.

But there is growing evidence that expensive crude is damaging the US economy, which, of course, will ultimately hurt petrochemicals demand (if it hasn’t done already…).

“US economic activity is still pushing oil demand growth into the negative,” wrote OPEC in its monthly oil report for April.

Latest firm consumption figures, for January, showed a 4.3 percent year-on-year contraction in consumption, the second-highest since July 2009, the report added.

Preliminary data for February and March also indicate contractions.

“The usage of some industrial and transportation fuels, especially distillates and gasoline, accounted for the bulk of this contraction,” continued OPEC.

As transportation costs for industry have risen, so has the cost of petrochemicals, because, as we mentioned above, pricing is linked to the crude-oil price.

Pricing in the US has been further boosted by up to five crackers, 10 percent of US ethylene supply, being off-line in March-April.

US petrochemical industry executives were full of optimism during the International Petrochemical Conference (IPC)*, which took place in San Antonio, Houston, earlier this month.

They talked of both the shale-gas bonanza and the strength of the US economic recovery.

But if the US is in such a great shape, why was it that industry was unable to absorb higher fuel costs during the first quarter?

A further factor that should have boosted overall economic activity, and therefore the affordability of crude, was the warmest winter in 50 years.

This suggests that a big driver of petrochemicals demand during Q1 was consumers “buying forward” to hedge against more expensive crude and impending cracker turnarounds.

Barring a major geopolitical crisis involving the West and Iran, the demand and supply fundamentals point to weaker crude.

As petrochemical buyers destock we might, as a result, see a very different second quarter.

*The IPC was organised by the American Fuel and Petrochemical Manufacturers (AFPM).