By John Richardson
IF you are a petrochemicals sales and marketing executive you probably came back to work after your end-of-year holidays feeling a little bit more optimistic. This
was the result of the rebound in oil markets resulting from the Saudi Arabian and Iranian ongoing geopolitical tensions.
But, of course, as we all know, that optimism lasted barely two days. Until the oil market finds its bottom, Asian petrochemicals markets will remain pretty much in chaos, as no buyer is going to make major commitments for two reasons:
- If they buy today, they run the risk of finding that their petrochemicals and polymers raw materials will be cheaper tomorrow on another decline in crude.
- There is a growing, sadly very late, understanding about what the oil market says about the wider global economy. Therefore, historically very weak and volatile crude tells everyone up and down all the petrochemicals value chains that there is something fundamentally wrong with the world’s economy.
We can obviously write off January in Asia. Sales were already going to be weak because the Lunar New Year in 2016 falls earlier than it did in 2015: The actual New Year’s Day itself will be on 8 February rather than last year’s 19 February. So the whole holiday period has been brought forward. Buyers realise that China’s markets will be essentially dead between 1 February and 17 February.
Beware, though, of the people who tell you that this seasonal factor, once out of the way, promises a strong late February and early March as restocking gathers momentum. Not necessarily. If, as I said, crude markets fail to find their bottom, then restocking will be limited. “Hand-to-mouth” buying patterns will thus continue.
The thing is that the people who tell you, “Oh, this is just mainly a seasonal factor,” are likely to be the same people who told you first of all that the natural price for oil was around $100/bbl. These are the same people who then told you, “OK, I was wrong about that. But there was no way that crude can break below $60/bbl. Supply and demand makes this impossible, as most of the high cost shale oil production will shut down”.
Next they told you that the floor was $45/bbl, and so on and so on. Only this week I heard someone comment, “I didn’t think it could go below $30/bbl”.
I have long argued that the problem is that people have grown up in a world where oil prices have only been higher. Either that or they have forgotten as recently as 2006, when one major consultancy had three oil price forecasts for that year: Around $17/bbl, around $30/bbl and a high of $40/bbl.
The other core of the problem is that they work in silos. They are often, of course, oil, gas and petrochemicals industry experts with a strong engineering and economic modelling background. So they don’t necessarily always think about the wider economic, social and political factors that shape all markets. So they missed the demographic turning point, which have been highlighting since 2011. They also failed to recognise the other critically important turning point for what it really was: China’s decision to withdraw stimulus from early 2014 onwards.
What does the petrochemicals sales and marketing executive do next then? Here is some specific advice on oil markets, which will at least help you deal with the immediate outlook.
We have never know a major price movement, of the kind we’ve seen with oil over the past 18 months, end without an overshoot either way. It seems very unlikely that it could suddenly stabilise at $25/bbl. Supply/demand factors suggest there is still a major imbalance in the market:
- The IEA says there are a record 3bn barrels of storage.
- The US has record storage, and European storage is virtually full.
- China’s demand growth has slowed as its economy moves into its New Normal mode.
- The mild Western winter has reduced demand for heating purposes.
- Two major exporters are now re-joining the market. Iran is expected to add up to 500kb/d in January when nuclear sanctions end, and has said its production costs are $1.70/bbl. It wants to regain lost market share as quickly as possible. The US has just begun shipments. Given its high storage levels, it would make sense to monetise these via sales, especially as they are costing money to store.
The short-term outlook for oil is weak, given, as I said, that Chinese/Asian demand is now slowing ahead of Lunar New Year on February 8, and March will see the traditional maintenance season for Western refineries after the winter.
The outbreak of tensions between Saudi Arabia and Iran makes it most unlikely that OPEC could agree to any major cuts in production, even if Saudi wanted to change course – which seems most unlikely.