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Early reactions to negative US oil prices from petchem industry

by Pınar Polat - ppolat@chemorbis.com
by Esra Ersöz - eersoz@chemorbis.com
  • 22/04/2020 (13:04)
On Apr 20, a day ahead of expiry, May contract for the US oil benchmark West Texas Intermediate (WTI) on NYMEX crashed to below zero for the first time in record to settle at negative $37.63 per barrel. An oversupplied market and collapsed oil demand caused by the coronavirus pandemic were the factors to blame for this historical plunge.



Upon the tweet of the US President Donald Trump, stating that they will purchase roughly 75 million barrels of oil to add the country’s Strategic Petroleum Reserve, the thinly traded May contracts for WTI on NYMEX moved back above zero to settle around $10/bbl on Tuesday. Nevertheless, WTI for June contracts, which settled at above $20/bbl on April 20, dropped by more than 50% to below $10/bbl on Tuesday before settling at $11.57/bbl.

Brent crude in London, meanwhile, reacted to the historical slump of WTI crude on Tuesday, with June contracts slumping by 25% to end around $19/bbl.

Now, all eyes are also on the initial reactions from the petchem industry. Players feel being caught in a quandary, trying to assess how the feedstock and polymer markets will respond to such an extraordinary incident.

Oil rout drags naphtha down in Europe and Asia

On Tuesday, April 21, spot naphtha prices on CFR Japan decreased around $15/ton to $190-195/ton while spot naphtha prices on CIF NWE basis witnessed a larger daily loss of around $50/ton to be reported at $105-110/ton.

How about ethylene and propylene?

Asian ethylene’s reaction to tumbling oil more visible than propylene

In Asia, spot ethylene prices on CFR Northeast Asia basis retreated $55/ton on a daily basis on Tuesday, April 21 to $330/ton in the face of ample supply and thin demand amid crashing crude oil.

Spot propylene prices on CFR Northeast Asia basis, on the other hand, posted a relatively smaller daily loss of $10/ton to be reported at $655/ton as tumbling oil halted demand.

European markets mostly stable at multi-year lows

Spot ethylene and propylene prices on FD NWE basis were mostly stable on the first few days of the week to be reported at around €390/ton and €605-610/ton, respectively. These indicated the lowest levels not seen since March 2016 for spot propylene while spot ethylene prices were never so low since ChemOrbis started compiling data in 2007.

Knee-jerk reaction from Asian, European styrene to shocking fall in oil

The Asian spot styrene market followed oil prices lower on Tuesday, April 21 with both CFR China and FOB Korea basis prices falling around $45/ton to respectively stand at $585/ton and $555/ton.

European spot styrene prices on FOB NWE basis, meanwhile, declined $60-65/ton on Tuesday, April 21 to $480/ton, mirroring the crash in WTI Nymex.

In the heat of the moment, polymer players, particularly operating in the polyolefin sectors across China, Turkey and Europe, have started to share their opinions regarding the possible impacts of this negative oil settlement on spot prices.


Rebound in China’s PP, PE markets proved short-lived

PP and PE prices in China had a strong bounce back by early April with support from improving demand inside the country, especially for medical applications including facial masks. Increasing factory production, ending lockdowns as well as promising economic data and firmer futures provided the basis for the revival of buying interest.

However, players were not confident even during the rally as they were already questioning its sustainability. This was because they believed that a stronger demand recovery was needed for this price rebound to be long-lived. Not surprisingly, both spot and futures prices have witnessed downward corrections soon after mainly due to lower futures.

PP, PE price back down, buyers retreated to sidelines

Import PP and PE markets have moved back down after two weeks of notable gains in sync with retreating futures prices triggered by the historic loss in oil futures, sending buyers to readopt a cautious stance.

A similar case has also been in place for local polyolefin prices in China.

Pace of losses accelerate on Dalian after oil turbulence

Apart from the certain downward pressure from plunging oil prices, the short-lived demand recovery and high inventory pressure also weighed on futures prices.



September LLDPE futures, the most actively traded contract at the Dalian Commodity Exchange, posted a total loss of CNY360/ton ($51/ton) on April 20-21 while September PP futures witnessed a cumulative decrease of CNY234/ton ($33/ton) within the same period.

It will be supply-demand fundamentals to drive prices, rather than oil

Initial feedback from players in the major markets including China, Turkey and Europe have highlighted that expectations regarding the near-term are still driven by supply-demand fundamentals despite the memorable loss in Nymex.

China

Apparently, Chinese PP and PE players have remained focused on the pressure from the supply and demand side.

A PP trader reported that prices have posted decreases this week due to retreating futures markets and supply pressure. “We think that the impact of the negative WTI settlement on Nymex on Monday will be felt on the market over the long term. As for the short-term, we think PP prices will continue to rely on supply-demand fundamentals,” he opined.

Turkey

Turkish players’ opinions regarding the impact of the oil plunge, meanwhile, are divided into two.

Some players believe that it is inevitable for downstream prices not to feel the pressure from the turmoil in the energy market. They are also closely monitoring the developments in China’s PP and PE markets, arguing that Turkish buyers were already cautious even during the recovery in China.

Others concur that the oil crash has already weighed down on the sentiment, but they don’t expect to see a huge reflection on polyolefin prices.

Europe

A major market player in Europe noted that they don’t expect to see huge losses in prices in May. “If the situation in crude remains critical, then May propylene and ethylene contracts may settle after May 1. We think propylene contracts may fall €40-50/ton while ethylene contracts may lose €70/ton.” he commented.

“Brent hovers at around $19/bbl and we hope it won’t visit negative territory,” he added.
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