‘Early signs’ of crude market rebalancing, petchems to gain long term - IEA chief

Author: Jonathan Lopez

2020/05/14

LONDON (ICIS)--Crude oil markets are showing “early signs of rebalancing” as output cuts by OPEC+ countries kick in and some economies move to reopen, the executive director at the International Energy Agency (IEA) said on Thursday.

Some petrochemicals end markets like those for medical equipment and disinfectants have staged a revival during the coronavirus pandemic, a trend that is likely to stay in the long term, said Fatih Birol.

“I wouldn’t think the petchems industry will be so badly affected [in the long term] as other sectors of the oil consuming sectors,” he said, speaking to reporters in Paris.

“There are two types [of end demand]: We see a push in demand because of need for PPE [personal protective equipment], disinfection, and packaging ... at the end of the day, petchems won’t be one of the badly hit sectors; on the contrary, it is set to be one of the more resilient,” he added.

Birol also mentioned the “downward pressure” in the automobile and construction industries, although a recovery there may come in coming quarters as economies reopen.

PANDEMIC UNDER CONTROL
However, all predictions by the IEA in its monthly oil report published on Thursday are subject to the pandemic being controlled – new outbreaks and consequent lockdowns to control them would bring further havoc to the crude oil markets.

The agency said that the number of people worldwide under some sort of confinement will slip to 2.8bn by the end of May compared to 4bn people in April.

As economies reopen, demand is also picking up, albeit very slowly. The IEA said what it dubbed “Black April” for the oil market had been left behind, but added that a rebalancing of the crude oil markets would only start in earnest in the third quarter.

In its April report, the IEA projected crude oil demand would fall in 2020 by 9.3m bbl/day, but it has now revised that figure to 8.6m bbl/day.

OPEC said this week 2020 demand growth would be 9.07m bbl/day lower than in 2019.

The loss in demand in 2020 will, however, is set to wipe out nearly a decade of growth.

The IEA estimates that by the end of 2020 the US will be the country reducing output the most, down 2.8m bbl/day compared with 2019.

Saudi output is expected to be 900,000 bbd/day lower by the end of 2020, year on year.

“It is on the supply side where market forces have demonstrated their power and shown that the pain of lower prices affects all producers. We are seeing massive cuts in output from countries outside the OPEC+ agreement and faster than expected,” said the IEA.

Meanwhile, state-controlled producers continue cutting output in an attempt to rebalance the market – Saudi Arabia’s output in June is expected to be 4.4m bbl/day lower than in April’s record.

PETCHEMS FEEDSTOCKS
The IEA said the feedstock cost advantage of US petrochemicals producers, which have enjoyed a decade low ethane prices on the back of the shale gas boom, may be coming to an end as low crude oil prices make naphtha-based petrochemicals production more competitive.

The US will have to add to this a fall in demand due to the recession in the country.

The boost to the petrochemicals industry coming from the health emergency caused by the pandemic cannot hide the pain in key industries like automobile, which consumes around 20% of petrochemicals output.

Across the world, automobile production plants were mostly idled in April, and attempts to restart production in May, especially in Europe and North America, have been confronted with non-existent demand.

US April new auto sales fell 25% month on month in April and 48% year on year. In the UK, car sales fell a staggering 97% in April, month on month, according to the country’s trade group SMMT.

The EU's trade group ACEA is due to publish April figures on 19 May.

“Ethane-based petrochemical activity is also likely to suffer from a drop in plastic demand (in particular from the automobile industry). US petrochemical feedstock demand will be severely impacted in Q2 by the decline in global ethylene demand and losses of competitiveness,” said the IEA.

“Rising natural gas prices pulled ethane prices higher while falling oil prices undermined naphtha prices. The recent collapse in oil prices has made Europe and Asia naphtha-based crackers more competitive versus US ethane-based plants.”

The IEA added that overall liquefied petroleum gas (LPG)/ethane demand as feedstock for the petrochemicals industry is set to fall in the US by 220,000 bbl/day this year, compared with 2019.

In Europe, LPG/ethane and naphtha demand is set to fall 35,000 tonnes in 2020, year on year, while that for naphtha would fall 75,000 bbl/day.

Fuel oil demand in bunkers is set to fall 170,000 bbl/day.

STORAGE: NOT EASY
With the crude oil markets grappling with a storage crisis due to the overhang, the IEA said that if the crisis was to reach the petrochemicals industry it would a “more complicated” story given the difficulties in storing highly dangerous products.

“Primary olefins (ethylene, propylene, butadiene [BD]) are stored in spherical tanks. Aromatics (benzene, toluene, xylene) are more likely to be stored in floating roof tanks. These require more rigorous safety precautions such as blanketing with inert gases, security valves, etc,” said the IEA.

“Olefins may be prone to generating rubbers and other potential problematic compounds in lines and instrumentation. Polymers and other secondary chemicals require even greater care.”

Front page picture: A pumpjack in California, US
Source: Etienne Laurent/EPA-EFE/Shutterstock

Focus article by Jonathan Lopez

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