$70 oil to speed up decisions to add new PE plants – analyst

Author: Al Greenwood


HOUSTON (ICIS)--Rising oil prices will increase returns on new polyethylene (PE)  plants in the US, which will cause companies to spend less time in arriving at a decision to expand capacity, an analyst said on Tuesday.

Higher oil prices and the recent US tax reforms would increase returns on invested capital (ROIC) to 23% from 16% for integrated polyethylene (PE) complexes, Jefferies said.

In addition, higher oil prices would attract new participants, such as refiners and investors from China, according to a research note from Jefferies.

US producers benefit from higher oil prices because they rely overwhelmingly on ethane as a feedstock, while much of the world relies on oil-based naphtha. As a result, when oil prices rise, US producers achieve a feedstock advantage.

In addition, higher oil prices encourage more drilling in the US, which results in more associated gas. This is rich in ethane and other natural gas liquids (NGLs).

A rise in capital expenditures was one of the 12 scenarios that could occur if oil prices rise above $70/bbl, Jefferies said. Already, prices for Brent are up 28% year on year and 23% above the 12-month average.

Other effects from $70/bbl oil prices include higher chemical prices, Jefferies said. The market is tight enough to allow producers to pass through higher input costs. Jefferies expects PE prices to rise by about 6 cents/lb ($132/tonne) and polypropylene by up to 15 cents/lb.

The ethylene cost curve will also steepen by about 6 cents/lb after factoring in the effect that oil prices will have on co-products like propylene and butadiene (BD), Jefferies said. This should help companies like LyondellBasell by offsetting the effects of the new PE plants that have come online.

Higher oil prices will make plastic recycling more attractive. If oil prices remain high for 2-3 years, then the subsequent increase in recycling should reduce demand for virgin PE by 4-5%, Jefferies said.

The run-up in crude could encourage companies to find ways to consume less energy. This would benefit several chemical companies that produce materials used in insulation and light-weight composites.

Because higher oil prices makes ethane more attractive as a feedstock, Jefferies said overseas exports should increase.

In China, several companies run methanol-to-olefins (MTO) plants and produce dimethyl ether (DME) as a fuel. Higher oil prices would play a factor in these markets as well, Jefferies said.

For gasoline, prices could reach $2.75/gal in the summer, up from $2.50/gal during Christmas, Jefferies said. The increase is still not large enough to cause consumers to spend less money on other items. For that to happen, gasoline prices need to rise by 30-40% year on year.

Ethanol is blended into gasoline as a fuel, so higher oil prices could improve margins for the material.

Oilfield chemicals could see a jump in demand because of increased fracking and drilling.

Higher oil prices make renewable chemicals and electronic vehicles more attractive.

Oil prices will have an effect on working capital, Jefferies said. Free cash flow in the US chemical sector could fall by $7.5bn. Higher oil prices could lower free-cash-flow/sales by about 200 basis points to 6.5%, Jefferies said. "Companies closer to refiners and crackers in the value chains will bear the brunt of this."