Ethylene prices have 96% correlation to oil prices

Chemical companies

SHARE THIS STORY

C2 pricing Jan14Companies are about to review their Q1 performance, and re-forecast profit and revenue for the rest of the year.  Most will be disappointed with results so far, as the long-promised economic recovery has again failed to appear.

This will be no surprise to blog readers.  But there is another and connected issue for Management Teams to worry about as we head into Q2.  This is the unnatural calm that has settled over the oil markets in the past 6 months, as the blog discussed on Tuesday.

What would happen to their business if oil follows copper and other commodity markets and starts to tumble?  Would it really stay within a narrow range, above $90/bbl?  This seems highly unlikely, given the enormous amount of speculative money tied up in the market.

And if it does fall below $90/bbl, what would this mean for the prices of the major petrochemicals?

This question can at least be answered with more than 95% accuracy, as the above chart shows:

  • It maps annual average European ethylene prices on the x-scale; annual average N Sea oil prices on the y-scale
  • The data goes back to the first ethylene contract price in 1978 and is colour-coded by decade
  • It shows there is over a 95% correlation between the two: if oil prices move, so does ethylene

The same rule applies to all the other major petrochemicals – propylene, butadiene, benzene and paraxylene.  The propylene correlation is 97%, butadiene is 90%, benzene is 92% and even paraxylene is 87%.

Thus if oil prices do fall, we can be reasonably confident about what will happen to product prices.  As the table shows on the chart, an oil price of $75/bbl would indicate an ethylene price of $1250/t; oil prices at $50/bbl would suggest ethylene prices of $900/t.

In the long-term of course, lower prices would be good for demand.  Consumers would have more discretionary cash to spend.  But oil producers have got used to today’s higher prices, and factored them into their budget calculations.  Riots, or worse, might easily break out in some countries if these budgets came under pressure from lower prices.

Of course, managements might just decide to ignore the issue, and hope the consensus is right to assume oil prices will never again fall below $100/bbl.  But history would suggest this is actually a very risky position to take.  Anyone without a Plan B might look very exposed, given the weaknesses now being exposed in the global economy.

PREVIOUS POST

China's lending problems begin to worry wider world - too late

19/03/2014

Suddenly, people are starting to talk about China and the risks it creates for ...

Learn more
NEXT POST

Cotton prices slip as US supply rises and China's imports fall

21/03/2014

It seems that cotton prices are about to return to normal levels again.  The b...

Learn more
More posts
Chemicals in the eye of the storm as UK heads for a WTO Brexit on 1 January
18/10/2020

On Friday, the UK premier confirmed what many of us have expected for a long time. There is unlikely...

Read
Chemical industry has key role in helping to create a more sustainable world
20/09/2020

The chemical industry has a critical role to play in enabling the world to “build back better&...

Read
Local circular plastics solutions to replace mega projects business model
30/08/2020

NEW YORK (ICIS)–There will be a paradigm shift away from mega crackers producing massive volum...

Read
Reshoring set to create Winners and Losers as advanced manufacturing takes over
12/07/2020

Not many companies still operate in the same way as 500 years ago, or even 50 years ago. But in manu...

Read
Polyethylene’s crisis will create Winners and Losers
08/12/2019

Polyethylene markets (PE) are moving into a crisis, with margins in NE Asia already negative, as I h...

Read
Day of reckoning approaches for US polyethylene expansions, and the European industry
08/09/2019

Planning for future demand in petrochemicals and polymers used to be relatively easy during the Baby...

Read
Stormy weather ahead for chemicals
24/03/2019

Four serious challenges are on the horizon for the global petrochemical industry as I describe in my...

Read
Ethane price hikes, China tariffs, hit US PE producers as global market weakens
23/09/2018

Sadly, my July forecast that US-China tariffs could lead to a global polyethylene price war seems to...

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