Leave it to $80 crude to shake up US petrochemicals

There’s something about $80/barrel crude that gets petrochemical markets in the US all riled up.

As the energy complex slowly emerges from its latest dip, let’s take a look at how some of these key markets fared over the past two weeks.

We’ll start with the usual suspects — aromatics — and move our way down to more “decoupled” markets — i.e., those closer to natural gas.

Benzene

US prices had been tanking for a while, in essence since early August as demand eroded and imports from Asia picked up. But things got serious in recent weeks.

The market saw prices shed nearly 12% in a matter of days, culminating with last week’s prompt pricing hitting a 34-month low of 375 cents/gal ($1,121.25/mt) FOB USG on Oct. 15, before recovering some so far week.

As a whole, benzene prices have fallen some 27% since late July. There’s no doubt slower demand and a glut of imports have driven down prices. Having crude fall might have felt more like stepping on the accelerator while driving downhill.

Toluene

Prices appeared to regain some ground after falling steeply in early September, and they seemed to resist downward pressure from falling energy…until last week, that is. Month-1 pricing has sunk nearly 14% since reaching a month-high of 369 cents/gal FOB USG on Oct 9. Prices opened this week at 34-month low of 320 cents/gal ($966/mt).

Xylene

Like benzene, prices had been receding since July, but things fell quickly over the past two weeks, reaching a 46-month low of 318 cents/gal ($963.54) FOB USG on October 20 before hinting a rebound the following day.

Yes, you read that right: 46-month low, or nearly four years, per Platts data. Sources in both the toluene and MX markets have put the blame squarely on falling crude and RBOB to go with weak demand.

Now, it’s common knowledge in these aromatics markets that crude prices are a big influence, and not just in the US. Correlations are well established and tracked. But what about some of the other key basic petrochemicals, the olefins?

In Europe and Asia, that’s an easy answer. Olefins are heavily influenced by crude prices, as the main raw material or feedstock used to produce them is naphtha.

In North America, however, things are different. The US petrochemical industry in particular has historically relied on natural gas liquids for production, and a strong shift away from heavier feedstocks like naphtha toward lighter ones like ethane is both palpable and ongoing.

 

Data illustrates that olefins feedstocks outside of naphtha have for the most part decoupled from crude and mimic more closely the behavior of natural gas. North American olefins producers can thank the shale gas boom for that, and all the ethane it continues to pump out of those plays.

Notice I mention feedstocks and not the olefins themselves. Why? Look at ethylene, for example. Despite having ethane in rejection and at dirt cheap prices (assessed at 21.50 cents/gal to open the week), US Gulf Coast ethylene pricing was until very recently at record-high levels.

There are supply/demand reasons for this, of course. Production issues, longer than expected outages, etc. And then there is the (rather well-founded) argument that ethylene pricing and that of key derivatives like polyethylene remain tied to international naphtha pricing behavior, as most derivatives compete in the export markets.

Whether real or psychological, the notion of $80/barrel oil shook up these markets as well. That, or it was just a big coincidence, depending on your opinion. Here is the skinny:

Ethylene

After reaching record highs of 76.25 cents/lb ($1,681/mt) FD USG in H2 September, Month-1 spot ethylene has fallen nearly 20%.

Indeed, some of this is tied to  Q4 steam cracker restarts (real and expected) as well as an unplanned maintenance of a major pipeline connecting the main Texas hub with Louisiana consumers, which some sources feared could cause a glut at the Texas hub (much like what happened around the same time last year when a similar issue occurred).

But consider, most of that decline (8.50 cents/lb as of October 21, to be clear) has come since October 7. October spot ethylene is trading this week closer to 60 cts/lb, approaching levels not seen since July, per Platts data.

Propylene

Fresh off hitting levels not seen since mid-2011 to start October, spot refinery-grade propylene prices have nosedived 12.25 cents/lb ($270/mt) or more than 16% since October 7.

The circumstances surrounding its fast and furious rise — spot RGP was assessed as low as 57.50 cents/lb in early September — and equally impressive fall are remarkable. As market sources tell it, an already tight spot RGP market saw both petrochemical producers and at least one refiner step into the market in late September in need of product. Next thing they knew, product was trading at alkylation values for propylene, something it had not done since January.

Alkylation values for propylene formerly had dictated the floor for refinery-grade propylene, but that’s changed. So far in 2014, spot RGP has traded at roughly a 17-cent/lb discount to alky values, per Platts calculations. So if alkylation values were blamed for the sudden rise, they could also take credit for the sudden drop.

With crude falling in recent weeks, the value of propylene for use in alkylate (a gasoline blendstock) also took a dive, falling below 60 cents/lb at one point, then hovering in the low 60s cents/lb range. You can guess where spot RGP traded next last week. Spot polymer-grade propylene pricing has shed much more moderately, down less than 2 cts/lb since early October, but not before helping sellers negotiate a 4-ct/lb increase on contracts for the month.

Methanol

Tied strongly to natural gas, sources in this market have shrugged at the notion of a weaker energy complex, although some acknowledged that over time the relationship tends to be clearer.  Pricing is off some 2-3 cents/gal from October 1 (130 cents/gal), but some argue it has more to do with overall softness seen in Q4 than anything else.

Is $80/b oil the new normal? Probably not, although some would argue it very well could be in a not-too-distant future.

Even at these levels, the consensus is that North America retains a feedstock advantage over naphtha-fed regions. That said, naphtha-based margins do improve, making said production more economically feasible.

It definitely got many in the US petrochemical markets talking again — and paying attention.

Your take

What’s the new normal for oil? WTI at $85/b and Brent at $90/b?

Platts