Study: Lower oil prices to boost petrochemical demand over long-term

The recent decline in global oil prices is causing some petrochemical supply chain destocking, but is also sowing the seeds for better economic conditions, lower petrochemical prices and improving global petrochemical demand. 

These trends are ultimately leading to tighter market conditions, according to new analysis from global consultancy IHS.

 

“Since oil serves as the marginal production cost and price-setter for many chemicals, plastics and fibers, a decline in the oil price typically leads to lower product prices,” said Dave Witte, senior vice president and general manager of IHS Chemical.  

“At the same time, the lower prices and broad macro-economic benefits of lower energy will ultimately lead to higher petrochemical derivative demand," he continued.

"Simultaneously, we see assets that derive margin from a wide gas-to-oil differential—such as those in North America and the Middle East—experiencing margin decline. Large, capital-intensive projects already under way will continue in these cost-advantaged regions. However, we expect a lull in future investment plans as chemical producers wait for forward clarity and for some of the market volatility to ease.”

 

The largest volume and perhaps the most market-indicative petrochemical is ethylene, which is the basic building block for many downstream chemicals, plastics and synthetic fibers. Improved demand for consumer products from higher GDP eventually translates into higher ethylene demand as much of the resulting plastics production ends up in consumer products. 

Yet, the IHS scenario analysis said lower oil prices will initially lead to destocking as producers wait for signs of a price bottom even as demand growth accelerates.

 

On the supply side, lower crude oil prices will change ethylene production costs over time, impacting the global ethylene market. In 2015, according to IHS Chemical, current global ethylene operating rates will still remain below 90%, and the positive effect on global demand will amount to less than 1 million tpy.

 

But by 2016, depleted inventories, together with faster consumption growth, would generate additional global ethylene demand that is more than 1 million tpy above the previous higher crude oil price-based forecast. The greater demand growth would add up to 3.5 million tpy by 2020. 

 

"More importantly, the supply pressure on global ethylene producers will intensify if higher demand volumes materialize, which will cause operating rates to rise above 90%," said Witte. "Combined with potential investment delays, utilizations could possibly climb as high as 95% by 2023. 

"This exceedingly high operating rate would represent a five to six point increase in operating rates and would be one of the most significant outcomes of the lower oil price projections. During the years 2017 to 2020, IHS expects it would signal tight market conditions that the industry has not witnessed in many years, and would drive margin expansion opportunities for producers.”  

 

According to the IHS scenario analysis, the differential between oil- and gas-based feedstock prices in the various regions (Europe, Asia, the Middle East and the Americas) divides cost-advantaged from cost-disadvantaged chemical producers in a very competitive market. 

Whether the analysis focuses on the elementary feedstock choices (naphtha, ethane or propane), power costs, alternative values for use in crude oil refinery products or heating markets, successful producers must find means to create a competitive advantage at the level of relative oil to natural gas price. 

Advantaged producers, and even their customers, IHS said, capitalize on these advantages through investments in new multi-billion dollar production facilities.

 

“With as much as 75% of the cost of producing petrochemicals related to hydrocarbon values, those companies with a cost disadvantage may invest to acquire lower-cost raw materials, or attempt to relieve competitive cost pressures through product differentiation," said Witte.

"But typically, they cannot overcome the cost disadvantages, and as a result, will likely experience lower margins," he added. "There is a bright spot, however, as we expect market participants may be surprised by the strength of global petrochemical demand growth spurred by the lower energy prices. Returns on capital related to existing facilities will be higher than expected, but the incentive to invest in new, gas-based facilities will not be as attractive as outlined in original capital plans.”