Petrochemicals Destocking Phase Likely As Crude Volatility Increases

China, Company Strategy, Economics, Oil & Gas

By John Richardson

WE COULD now be in a destocking phase in petrochemicals markets as oil prices are falling on a surge in US production.

This would obviously mean lower petrochemicals pricing, leaving companies that have overbuilt raw material inventories with substantial financial losses. I hope that most companies have been prudent.

In January, the EIA estimated that the US would surpass 10 million barrels a day of crude production in February. But it hit that level last November as actual production in January hit 10.2 million barrels a day. The EIA’s February Short-Term Energy Outlook forecasts that US output will be above 11 million barrels a day in 2018. Only last month, the agency said that the US wouldn’t reach this amount until November 2019.

As the goalposts keep moving on US production levels, also hanging over the market is the record number of long positions held by the hedge funds.

The hedgies have made excellent money on buying crude and shorting the dollar. But they may soon start going short on crude whilst switching to long positions on the dollar. This would be in response to higher-than-expected US production and a “risk off” tactic if equity markets suffer further declines. The dollar is often a safe haven when stock markets slip.

Further, we are heading into the refinery maintenance season that will dampen demand for crude. Meanwhile, another major seasonal demand dampener is just around the corner both for oil and petrochemicals, which is the Lunar Year Holiday. This takes place in 15-21 February but activity in petrochemicals markets is already winding down.

I could be so easily wrong as forecasting oil markets is very often fool’s gold. An unexpected turn of events may send crude soaring again. But even if this is the case, the events of the last few days illustrate the risks ahead as we enter a period of what seems likely to be exceptionally volatile crude prices.

  • Oil and equity markets (and they are both linked, of course) could suffer from repeated episodes of risk-on and risk-off. This would be the result of the ebb and flow of concerns over inflation and its impact on interest rates. A lot of focus will also be on the growing US budget deficit and its impact on the cost of borrowing.
  • Unexpected events could easily include geopolitics. Risks here include the Saudi Arabia and Iran relationship and the North Korea nuclear weapons programme. We are living through a period of great geopolitical tension.
  • I also believe that confusion over the direction of the global economy may add to uncertainty. Global economic fundamentals are not as good as conventional thinking suggests. In the case of China, its economy is likely to slow – albeit probably very moderately – in 2018.

Scenario planning around crude rising to $80 a barrel during the rest this year or falling to below $40 a barrel might thus be sensible.

PREVIOUS POST

House Of Cards Waiting To Fall: Oil, Equities And The Economy

07/02/2018

By John Richardson HOW much of the rise in oil prices since June of last year ha...

Learn more
NEXT POST

Asian Petchems Profits Could Test Historic Lows In 2018

12/02/2018

By John Richardson THE ASIAN steam cracker business has struggled to pass on hig...

Learn more
More posts
Global polyethylene in 2020: Margins will reach historic lows as new growth model emerges
08/12/2019

Here is a first of a series of outlook articles for 2020 where I focus on the risks ahead for the gl...

Read
Long term downcycle will transform global petrochemicals, creating new Winners and Losers
06/12/2019

By John Richardson THIS IS not a normal downcycle. Please get over that idea however many people, bo...

Read
Asian PE and PP margins at lowest levels in at least five years and will go lower……
04/12/2019

By John Richardson NOT since at least the beginning of 2014 have Northeast and Southeast Asian polye...

Read
Asian polypropylene market heads for major 2020 downturn
02/12/2019

By John Richardson THE ASIAN polypropylene (PP) market hasn’t been as bad as the region’s polyet...

Read
China new vehicle sales: A long term decline and what this means for petrochemicals
29/11/2019

By John Richardson THE MAINSTREAM view is that there is nothing fundamental about the decline in new...

Read
Asian copolymer polyproplyene used as a sink for growing oversupply of ethylene
27/11/2019

By John Richardson A SURE sign that the Asian ethylene-to-polyethylene (PE) markets are distressed c...

Read
Asian polyethylene shutdowns? Once again, good luck with that idea
25/11/2019

By John Richardson I was new to the game as I had only been analysing the petrochemicals business fo...

Read
Europe to become much more self-sufficient in polyethylene because of sustainability
20/11/2019

Yes, I know I promised to focus on Asia and its cracker-to-PE industry today and how the region will...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more