INSIGHT: Global downstream markets await Saudi drone strike ripple as feedstocks rise

LONDON (ICIS)–The attack on Saudi Arabia’s Abqaiq crude oil facility has sent shock waves through the global petrochemical markets, with players questioning the impact on downstream sectors.

As information slowly emerges on the severity of the situation, with ICIS experts estimating it may take between two to four weeks to repair the damage, further outages are expected to be confirmed in the coming days.

The drone attacks on 14 September damaged the Abqaiq and Khurais crude oil processing installations which supply feedstocks to Saudi Arabia’s three main petrochemical sites.

Polyolefin players are monitoring the developments closely, with a number of producers halting offers awaiting further clarity to the duration of the production problems.

This is unsurprising, with over 10% of global ethylene production coming from the affected three sites, or 16.6m tonnes in 2018, as well as 5.8% of global propylene production, 6.2m tonnes.

Further information from SABIC on the impact to its polyolefin production is expected shortly, after the Saudi petrochemicals major already confirmed over the weekend that some of its sites were lacking 49% of feedstock supply because of the attack.

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DOWNSTREAM MARKETS AWAIT FEEDSTOCK CLARITY
In markets further down the chain, producers are still awaiting information on the impact to feedstock, before being able to advise customers the effect to their own production.

There is 340,000 tonnes/year of methyl methacrylate (MMA) production in the region, with the Saudi Methacrylate (SAMAC) facility already at lower rates in recent weeks because of a planned outage, and then hiccups.

On the acrylate esters side, the impact is said to be “manageable” at this stage, with some producers living off feedstock inventory.

While the polyolefin, MMA and acrylate esters markets are vastly different, they have all been subject to longer market fundamentals and weak demand so far this year.

This trend has been prevalent across the majority of European chemicals markets as geopolitical tensions took a toll on underlying demand.

While demand is expected to remain poor for the foreseeable future, a major shortage of feedstock following the attack at one of the world’s largest petrochemical sites will change short-term fundamentals.

The first being the impact of higher oil and naphtha prices, with Asian naphtha increasing 13% in the aftermath of the attack.

HIGHER FEEDSTOCK MARK REBOUND IN CHINESE MMA PRICES
“Higher oil price has an impact on the C4 producers in China and Japan, with that then having an MMA price impact,” said one methacrylate’s producer.

MMA margins have been compressed throughout the year, as oversupply and poor demand exerted pressure, with many suggesting Chinese prices are close to the cash margin at this stage.

Sentiment in China has changed since July, with higher acetone prices resulting in a rebounding of MMA prices, which is expected to result in a shift in the export market.

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MMA exports from Saudi Arabia were expected lower due to the SAMAC production issues, but the recent attack may also impact the Petro Rabigh facility, a joint venture between Sumitomo and Saudi Aramco.

The sites are connected via the pipeline set up, with the facility likely to be constrained on feedstock because of the drone attack.

Petro Rabigh had not responded to a request for comment about production at the time of writing.

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PE SELLERS HALT OFFERS
Global polyolefin sellers have become hesitant so far this week, with many firmly adopting a wait-and-see mode, although a sharp increase in both Chinese and Middle Eastern polyethylene (PE) prices has already taken place.

Drops in feedstock drove decreases to September contracts, with European spot demand also weak in recent weeks.

The attack may act as a catalyst in the spot market, increasing short-term demand, if higher crude and naphtha prices continue throughout the month.

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An important driver will be the extent of any impact to SABIC’s polyolefin production in Saudi Arabia, with the producer a key exporter to the European market.

The producer was not immediately available to comment.

Within the 10% of global PE capacity located in Saudi Arabia, the country produces all grades of the polyolefin – low density polyethylene (LDPE), linear low density polyethylene (LLDPE) and high density polyethylene (HDPE).

ACRYLATE ESTERS FUNDAMENTALS DEPRESSED
There is also close correlation between the monthly propylene movements and monthly acrylate esters prices.

While long supply has made it difficult for European sellers to recover the full propylene pass-through in recent months, a spike in oil prices may bring a shift to what have been downtrodden fundamentals in recent months.

Margins are also a concern in this European sector, a potential uptick in feedstock may compress them further, or may provide momentum lacking in the market.

At this stage the global petrochemical markets wait with bated breath, with a clearer message to the extent of feedstock curtailments expected in the coming days, and with it a likely stream of downstream production announcements.

Top picture: Image provided by NASA shows fires following Houthi rebels claiming a drone attack on two major oil installations in east Saudi Arabia
Source: Uncredited/AP/Shutterstock

By Katherine Sale

Interactive content by Antonio Biancafiore and Miguel Rodriguez-Fernandez

For more on the impact on petrochemicals from the attack on Saudi Aramco, go to the ICIS topic page on the Saudi Arabia Drone Attacks