“Any Old Iron?”
Source of picture: http://www.investorfsbo.com/refinery.html
By John Richardson
A LONG-TERM shift in refinery economics is posing a major threat to petrochemical margins – along with the delayed supply crisis that’s likely to hit the industry at some point over the next year.
“Refiners, when the global economy was booming and particularly after the Hurricane Katrina gasoline supply shock, were pushing out naphtha to achieve balance across the barrel,” said Paul Hodges, chemicals consultant with the UK-based International eChem.
“But now you have worldwide oversupply in refining with US gasoline demand peaking in 2007.
“You have ethanol as a percentage of total fuel consumption in the States already having doubled from 5% to around 10% and likely to go to 15%.
“The new auto fuel-efficiency regulations, announced last year, require big improvements in vehicle efficiency – another drag on demand.”
And then there is the US economy, which, as we’ve said before on this blog, faces deep-seated long-term problems, including a far-from-complete deleveraging process.
US refineries ran at 78.4% of capacity in the week ended 22 January, steady with the prior week but down from 82.5% a year earlier, according to data from the Energy Information Administration (EIA), which was reported by ICIS news yesterday.
In the US, naphtha supply is unlikely to be the main issue for petrochemical producers as the big natural gas advantage over naphtha has led to a heavy switch to gas cracking. Instead, it’s the availability of propylene from Fluid Catalytic Crackers (FCC) that’s the big issue
Proof of this pudding came yesterday when US propylene producers nominated increases of up to 14% for February contracts on lack of availability from refineries, according to the same report already linked to above from ICIS news.
“In Asia, where gasoline demand growth is stronger, refiners outside China are being squeezed by the Chinese who have added so much capacity that they have swung into a gasoline export position,” continued Hodges – a fellow blogger.
N Ravivenkatesh, Singapore-based consultant with Purvin & Gertz, agrees.
Low refinery operating rates on poor gasoline and middle distillate markets – along with high Asian cracker operating rates – were likely to increase the East of Suez naphtha deficit in March and April, he recently predicted.
“A couple of recent, seemingly incongruous, headlines caught our eye,” wrote the authors of the daily energy and shipping report, The Schork Report, yesterday.
They were referring to the Bloomberg story on January 24 – headlined “Morgan Stanley Expects Oil to Rise to $95 (in 2010) on Demand” and one the next day on the same wire service, which was titled: “Refining Profit Stays Weak on Overcapacity, Ernst & Young says”.
“Ninety-five dollars on ‘strong demand’….huh? Did anyone on Wall Street see Valero’s earnings yesterday,” continued yesterday’s Schork Report.
But as we pointed earlier this week, you have to be aware of why someone might be making bullish growth forecasts.
“Ernst & Young is telling us about overcapacity in the refining sector. We suppose that is why 446mbbl/d of European and North American refining capacity was closed permanently in the fourth quarter (2009) and why another 663m bbl/d was shut down indefinitely and 560m bb/d partially shut down,” the report added.
This amounted to lost oil demand of 1.7m bbl/d by the end of last year, the Schork Report calculates.
But this doesn’t mean it’s ruling out the possibility of $95/bbl by the end of this year.
If the financial speculators continue to spin their “sustained global economy recovery” story successfully while credit remains cheap and plentiful on continued strong worldwide government stimulus and China doesn’t come off the rails, conceivably, yes. Why not?
But this would mean more pressure on refiners margins because even crude around $70/bbl is too expensive given the current economic fundamentals, never mind $95/bbl.
Petrochemicals would be squeezed from both ends of the product chain as refiners cut back even further, thereby reducing feedstock availability – with the firmer crude setting a higher floor for raw material costs.
Producers could also soon face, as we’ve already said, the long-awaited petrochemicals supply surge and damage to economic growth caused by the higher crude.
I am often accused of being overly pessimistic, but I really do believe petrochemical and chemical companies in general need to plan for a very difficult few years. It would be in everyone’s best interests to plan prudently.