Oil collapse spurs questions over storage limits, operations for chemicals

BARCELONA (ICIS)–With crude oil prices falling to record lows and storage space running out, there are questions about how likely it is the chemical industry could face a similar fate.

Both oil and chemicals markets have faced a huge drop in demand globally as coronavirus lockdowns have led to collapsing economic activity and steep falls in GDP.

Chemical and oil markets are also both heavily oversupplied with the shale boom making the US the world’s largest crude oil producer.

Shale gas has also added 10.5m tonnes of new ethylene capacity to global supply.

Crude oil storage globally is expected to reach capacity by May and there are now early signs that chemical storage may be reaching its limits, especially for some products linked to important end use markets such as automotive, which have all but ground to a halt.

For example, European mono ethylene glycol (MEG) players are concerned about storage for May as delayed imports from the US are due to arrive.

Demand has dried up amid lockdown extensions in Europe, especially in the antifreeze sector.

Coolant manufacturer Arteco has declared force majeure on MEG storage. The Belgium-based company was responding to a lack of demand following shutdowns at European automakers amid the coronavirus pandemic.

NAPHTHA SUPPLY GLUT
For European naphtha , fears of a supply glut mount as refinery run cuts are not as steep as required to support market sentiment and weak regional demand.

“Simple refinery and crack margins are still superb,” a source said.

Demand from petrochemical crackers, albeit operating at reduced rates, remains static, although downwards pressure is likely to mount as margins decline following lower ethylene and co-products prices.

ICIS believes naphtha demand as a gasoline blendstock and refinery reformer feedstock will remain low as the lockdowns persist globally amid overwhelmed storage and continued supply, compelling sellers to explore other regional markets.

Other value chains are not yet experiencing problems with insufficient storage capacity.

ICIS spoke to one styrene trader who said tanks were full, while others said there was room to fill.

“We do not see a lot of action on storages and needs for storage yet.  Spoke to [a major producer] – they are OK on their balances but expect possibly more SM [styrene monomer] later in May,” said a European styrene trader.

INTEGRATED EUROPE CRACKERS WILL RUN
With economic activity and demand continuing to fall by unprecedented amounts, cracker operators may not find a market for some of the products they produce.

For those integrated to refineries or gas fields, it may not be possible to cease operations even if pricing and margins are poor.

International eChem’s chairman Paul Hodges pointed out that only around 5% of refinery output is naphtha, so decisions by integrated companies will be driven much more by the refinery side of the business than by chemicals which are very much the “flea on the tail of the dog.”

He added companies will continue operating integrated operations so long as they are making money somewhere in the chain from the wellhead, refinery and chemicals.

“Even if you’re just covering your interest costs, you’re doing the right thing for the shareholders,” said Hodges.

Crackers attached to refineries which close down are more likely to also cease operations.

At least 36% of European refinery capacity is already operating at reduced rates or closed.

Analysis buy ICIS earlier in April showed that around a quarter of European ethylene capacity is threatened by cuts to European refining.

US CRACKERS WILL RUN TOO
In the US, ethane is a distressed product which has to be removed to make natural gas safe.

The only options you have are to make ethylene from it, store or ship it.

“If I am an integrated ethylene producer in the US what is the price at which I would turn off the gas supply because I can’t make money selling polyethylene [PE]?” added the consultant.

“Maybe there is, but it would be minus thousands. If you did shut down and the gas was needed, the government would simply take over your operations – you can ship it or store it, but you might as well get some value from it.”

OPTIMISE OPERATIONS
If crackers do keep running in low demand, price and margin conditions, operations can be optimised to avoid storage capacity problems.

The focus should be on producing products where there is demand, or where large volume storage is feasible such as polyethylene and other polymers.

According to John Richardson, ICIS senior consultant for Asia, there is enough demand for PE and polyethylene terephthalate (PET) resin for packaging to prevent the price going negative.

But polypropylene (PP) is under more pressure as a lot goes into durable goods.

There is a similar story for acrylonitrile butadiene styrene (ABS), high impact polystyrene (HIPS), polycarbonate (PC), and polymethyl methacrylate (PMMA) which rely on automotive and durable goods demand.

“You have all this butadiene [BD] you can’t sell – it’s a storage issue. You can put crude C4s back through a cracker but it cokes up the pipes so is not suitable for high operating rates,” he said.

Richardson said the answer is to adjust cracker operating conditions to focus on the markets where there is still demand.

If possible, run lighter feedstocks using more ethane and liquified petroleum gas (LPG) to give more PE, and using less gasoil will reduce production of aromatics.

The latest technology allows crackers to run at lower operating rates and still be profitable.

“The industry also faces huge destocking – people who bought at $50/bbl will be destocking like crazy, making the demand problem even worse,” he said.

“Make it into PE, PS, PP – store it and hope.”

Focus article by Will Beacham

Additional reporting by Joseph Chang, Melissa Hurley, Shruti Salwan, and Helena Strathearn

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