Home Blogs Chemical Connections Crude oil’s meteoric rise to ripple through supply chains

Crude oil’s meteoric rise to ripple through supply chains

ICIS, ICIS Pricing, Uncategorised
By Jeremy Pafford on 03-Mar-2022

Crude oil prices keep climbing, breaking well past the $100/bbl level and are headed higher in our ICIS analysts’ view. With that in mind, here are a few things to keep top-of-mind regarding crude:

  • Crude oil is the globe’s leading indicator of where chemical prices are likely headed. If the bull market for crude continues, chemical prices will want to follow. Why? Because most of the world still makes its chemicals and polymers from feedstock (usually naphtha) derived from the barrel of oil.
  • Crude oil remains the globe’s leading indicator of where energy and fuel prices are headed. With crude’s overall price movement tends to go gasoline, diesel, heating oil and more refinery-related fuel sources. High fuel prices weigh on consumers at work and at home.
  • Crude oil prices are inherently volatile and have had wild rides to the upside and down. In 2008, crude prices surged past $140+/bbl only to crash weeks later. WTI crude went negative for a day back in April 2020 amid the height of the pandemic. Crude can do crazy things, and those crazy things can have profound effects on businesses and consumers.
  • Supply chain members need an understanding of where crude is and where it is headed. Smart companies already do this even if they never will ever trade crude or have a barrel of it in the warehouse out back. Understanding the crude oil market helps in understanding current and future costs in transporting goods as well as understanding the foundation of future chemical and polymer prices (again, where crude goes, chemicals want to follow).

ICIS has some excellent datasets to help our market participants understand what is happening in crude oil and the energy complex. If the need is in the day-to-day movements, our World Crude Report offerings provide granularity and insight on a daily basis. If the need is more macro, Chemical Data’s Monthly Feedstocks & Fuels Analysis (MFA) is an outstanding monthly distillation of the crude, fuels and feedstocks markets and provides forecasts and analysis on what lies ahead.

Directly connected to crude oil price movements is one of the world’s leading chemical feedstocks — naphtha.

At the moment, cracking naphtha to make polyethylene (PE) and polypropylene (PP) is a money-losing proposition in northeast Asia and fast on the way there in southeast Asia, according to ICIS Margin Analytics. The crude oil price rise is to blame, as the knock-on price increases it is imparting into the naphtha market are running up against tepid polymer demand in the region, meaning upstream price rises cannot be easily passed on down the chain. Negative margins are untenable in the long term and put disadvantaged suppliers and their buyers at risk.

But is my supplier or competitor at risk (or, dare say, am I)? The ICIS Plant Cost Evaluator shows off its power in market times such as these. The northeast Asia HDPE graphic below tells a painful story for a vast majority of the suppliers needed to meet demand for the commodity resin, with just 2m tonnes/year of capacity – about 13% of the market – able to make money in these conditions, and the situation will only get worse if crude prices keep climbing, as it will likely continue to take naphtha along with it.

One might argue that most of those money-losing plants are in China, where the government has a substantial financial interest in manufacturing and thus can handle such losses for a short period. That person would not necessarily be wrong, although China did not build out its manufacturing capacity for only a fraction of its plants to operate in the black.

Let us head instead to Europe’s ethylene market. No labels this time – see if you can figure out where the challenges begin.

Basically, about 25% of European ethylene capacity needed to meet domestic demand is under water with ethylene prices at their current level. Plants whose ethylene costs exceed current prices include sites operated by LyondellBasell, Repsol, BASF and Slovnaft. Higher feedstock costs shoulder some of the blame, but escalating energy costs have played a key role as well. Even with the Europe ethylene contract likely to set a new monthly high in March, ethylene prices are not rising as fast as upstream costs, crimping margins, which have fallen by almost 61% since the year began (see chart below).

Crude oil prices are rising at a rate at which passing on the increases downstream is proving untenable in some markets. Its volatility will spur further volatility in those chemical and polymer markets, heightening risks for supply chains across the world. Hold on, as the ride is likely to get bumpier from here.

Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.