By John Richardson

ONE of the biggest risks for petrochemicals producers has once again become oil prices as we enter a period of weaker demand and longer supply versus the potential for a major geopolitical disruption to supply.

Crude prices could easily rise to more than $100/bbl on a geopolitical clash between the US and say Iran or China.  today’s market direction may continue with prices giving up all of their 28% gains  from November of last year to October 2018. Perhaps prices will fall by even more.

What is clear, whatever the outcome, is that the business as usual assumption of steady crude prices has to be challenged – and seems to me unlikely.

You must prepare for both a major upside and downside shift in oil prices and what this would mean for your approach to feedstock purchases and the pricing of your finished products.

Here’s the case for a continued collapse in crude:

  • John Kemp, in this thoughtful Reuters story, talks of crude reaching a cyclical peak in October 2018. He looks at the history of previous upswings and concludes that October could mark the point when supply gets ahead of demand.
  • The same Reuters author says that hedge fund managers were net sellers of petroleum-linked futures (gasoline and well as crude) for a fifth week running up until the last week of October. Net long positions were at a 15-month low at the end of October.
  •  As the world enters recession, a further sell-off in financial and commodity markets seems very possible, along with demand destruction of crude as economic growth declines.
  • The US decision to grant six month waivers to eight countries that import Iranian crude suggests that new US sanctions again Iran will have less a negative impact on supply than many people had thought. Behind the waivers appears to be White House concern over the harmful impact of high oil prices on economic growth.
    Two scenarios for LLDPE prices.

The business as usual approach to oil prices assumes that they stay at a Brent average of $73/bbl in November 2018-October 2019 in the 12 months from November 2018 until October 2019.

The chart on the left assumes the implications for CFR Japan naphtha costs and CFR China LLDPE prices of this business as usual approach.  Compare this with the chart on the right that assumes what would happen if crude gave up all of its 28% gains during November 2018-October 2017.

PE and PP price forecast reports
My Chinese colleagues and I are the authors of our monthly Asia PE and PP price forecast reports.

Let’s be honest, if any of us could forecast oil and petchems prices with great accurately, then we would be sitting on a beach in the Bahamas admiring our 200-foot yacht.

What we do aim for, though, is reading market direction correctly through making numerous calls to our contacts in China, Southeast Asia – and also in Europe and the US as polyolefins markets are of course global. Understanding market sentiment is as important, if not more important, than any spreadsheet.

And as the example above illustrates, our reports include different scenarios for PE and PP prices, with all the Excel data behind our assumptions available to clients.

For more details on the reports, please contact me a john.richardson@icis.com

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