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Where will global PP prices head after crude saw 18 year-lows? Any clue from past?

by Esra Ersöz -
  • 25/03/2020 (09:32)
Global markets are facing unprecedented times. US crude oil saw as low as $20/bbl by the middle of last week, despite paring some of its losses in the latter part of the week.

Oversupply, exacerbated by the price war between Saudi Arabia and Russia, and coronavirus-driven recession fears pushed oil prices to the lowest levels since February 2002.

Now the questions are:

How will PP markets react to the historical plunge in crude in 2020?
Will it be any similar to the years 2016 and 2009, when crude oil witnessed its latest lows?
Will 2020 be more challenging than before or will price drops be restrained?

What happened back in 2016 and 2008 in energy markets, and what happens now?

In February 2016, US crude oil futures moved below $30/bbl on NYMEX on a weekly average, according to ChemOrbis Price Wizard. This plunge was mostly triggered by oversupply concerns as Iran had returned to oil markets following the removal of sanctions at that time.

In 2008, however, the plunge in oil prices was largely driven by the crisis over the economic downturn from 2007 to 2009 after the bursting of the U.S. housing bubble and the global financial crisis. The bottom in oil prices was reached in February 2009 under $40/bbl after hitting a record-high above $140/bbl in July 2008.

Looking at today, crude oil futures have been hovering around their 17-18 year-lows. This time, the scene is not like any before, according to many analysts. As COVID-19 pandemic deepens recession fears, it may somehow resemble the 2008-crisis times.

However, what is different and more challenging now than any other time is the growing crude output. As a part of their price war, Saudi Arabia and Russia gear up to flood the world with crude oil by ramping up their production, let alone cutting. At the same time, demand for oil is falling sharply and signals further crash given the lockdowns across the board against the virus outbreak.

Homo-PP markets near 2016 lows except for Turkey

Homo-PP markets were already on a downward spiral in the second half of 2019 in major global markets. These steady declines mostly stemmed from ample supplies vs. weak demand. Growing domestic capacities weighed down on market dynamics particularly in Asia, exacerbated by the renewed trade war between China and the US in the second half of last year.

Interestingly, the reaction of homo-PP markets both to the virus outbreak and the historic losses of crude oil has been limited so far.

As can be compared from the table below, current average market levels in major markets have almost neared the low levels reached in February 2016, when crude oil was below $30/bbl.

Turkey stands out as the only exception since the Turkish PP market was highly inflated in the first two months of 2020 due to lack of regular supply sources. That is to say, the Turkish PP market has a larger room to fall than its peers with respect to 2016.

The bottoms in 2008-2009 suggest huge pressure on current PP prices

Going further back to 2009, crude oil prices ended their downward slide in February under $40/bbl. It is evident that homo-PP prices in China, Southeast Asia and Turkey did not fully accompany crude’s slump to the end as they hit their lowest much earlier in November 2008, except for Europe.

In Italy’s case, the table tells us that current PP prices would have a considerable room of around €300/ton to fall if it were to compare it with the 2009 bottom following the 2008 crisis.

When it comes to the case of China, Southeast Asia and Turkey; the prevailing PP market levels of today for Middle Eastern origins would have a room of around $150/ton in China and a larger room of $200/ton in Turkey and Southeast Asia if the 2008 bottoms were taken into account, based on ChemOrbis Price Wizard.

New PP capacity additions: More shadow on outlook?

What makes 2020 different from the 2008-2009 crisis is the capacity additions in the PP market. According to ChemOrbis Supply data, global PP capacities have risen by 40 million tons since 2008 and more than 80% of these new capacities have been added in Asia.

Needless to say, global PP consumption has also grown in line with the rising capacities; nevertheless, it remains to be seen whether this much supply can be digested at a time when global economies are on the brink of a recession.

May sharp decreases be avoided?

As was noted before, PP markets have shown a minimal reaction so far to the recent developments. Logistic disruptions as well as the lack of some supply sources may continue to prevent drastic changes in prices, according to analysts, although they widely concur that these factors will not fully succeed in avoiding the downward spiral in PP prices.
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