Monthly Thematic Piece

Oil Price Moves: Why The Instinctive Trades May Be Wrong
April 13, 2020
Products Mentioned:
Ethylene, Propylene, Butadiene, Ethane, Naphtha, Condensate, Benzene, Crude Oil, Natural Gas, Polyethylene, Ethylene Glycol, PET
Companies Mentioned:
Dow, LyondellBasell, Westlake, Celanese, Huntsman, Kraton, Lanxess, Covestro, Clariant, Arkema, OxyChem, PPG, Sherwin Williams, Akzo
Subjects Covered:
Cost Curves, Relative Pricing, Oil/Gs Ratios, Oil/Naphtha Ratios, Trough Margins, OPEC+ Oil Cuts

C-MACC Perspectives No 10

Oil Price Moves: Why The Instinctive Trades May Be Wrong

  • As oil rebounds – so do Dow and LyondellBasell and the rest of the commodity group in the US. This may be false hope and places too much reliance on one simple indicator, which has worked in the past but may not now.
  • Two other fundamental shifts are equally important and suggest a different outcome. The global oversupply of condensate/light naphtha and chemical demand.  Neither of these two factors support the US Chemical Industry medium-term.   


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At the risk of repetition, we are going to go over the argument one more time and then look at some ways in which we could be wrong. 

  • The global cost curve – implied in the simplified model behind the chart below – is flat. Based on all historical proxies it should not be.  This is based on week old data and a few days ago price changes flattened the curve further as West Europe became the theoretical low point.
  • The shape of the cost curve suggests that no-one region is the obvious place to cut back production in an oversupplied market – for reference, the cost curve was flatter in the cyclical lows of the mid-90s (impacting everyone) than it was in the cyclical lows of the early 80s, when the Europeans took most of the real pain.
  • At $30 Brent and sub $1.80 US Natural Gas, this should not be the case using any historical proxy and in our recent cost study we showed what the curve should look like based on historical relationships. Two factors are driving the diversion from history that we see today:
    • Ethylene co-product prices remain high relative to ethylene and feedstock costs – this favors the ethylene producers using heavier-feeds and generating more co-products.
    • Global naphtha/condensate pricing has collapsed relative to crude and bears no relationship to any historic average/proxy/trend.
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