Ukraine conflict pushes oil and gas prices up, chemical margins under pressure

BARCELONA (ICIS)–As the Ukraine conflict pushes oil and gas prices sharply higher, chemical margins in Europe are under further pressure as rising feedstock costs are not fully passed on in downstream selling prices.

European gas prices spiked by 30% over night while oil prices – which breached $100/bbl – are likely to be sustained in the long term as crude oil flows from Russia will be reduced, either through sanctions or by the country choosing to reduce flows, according to analysis by ICIS.

ICIS senior analyst, Ajay Parmar, forecasts that oil prices could rise further if the Russia-Ukraine conflict escalates. He said: “The core reason for the oil price rise is the risk of Russia either choosing to, or being forced to, reduce its oil exports to Europe. It could choose to reduce these exports in the same way in which it has done with gas, to cause pain to Europe but the more likely scenario is the West imposing strong sanctions on Russia.”

Russia currently exports around 2.3m bbl/day to Europe but if sanctions restrict Russia’s access to Western financial markets, it could make it difficult for Russia to sell its crude on the open market, as oil is sold in US dollars.

“This could reduce Russian oil exports during the exact period where OECD oil inventories are at a 7-year low; if this level of sanctions are applied by the West, oil prices could see a sustained spike well beyond the $100/bbl level,” according to Parmar.

CHEMICALS UNDER PRESSURE
High oil prices will feed down to chemical feedstocks, with naphtha prices likely to increase and products downstream likely to see upwards pressure on feedstock costs.

Overnight naphtha prices in Asia spiked, following rising crude oil prices.  On Thursday, open-specification naphtha indicative prices averaged at $898/tonne CFR (cost and freight) Japan for first-half April delivery, climbing $10/tonne from the previous day’s close. Prices have risen by more than 50% from levels a year ago, ICIS data shows.

However downstream chemicals demand may not be strong enough to fully push through these rising costs, putting producer margins under pressure.

High oil and electricity prices suck money out of consumers’ pockets and together with soaring inflation and rising interest rates, there are questions over the strength of downstream demand.

According to the ICIS Petrochemical Index (IPEX), chemical prices in Europe have been falling in for the past two weeks, despite rising oil prices.

ICIS senior data analyst, James Wilson, said: “Margins for naphtha-based ethylene producers in Europe have been falling since the start of the year, as producers have struggled to pass on increasing naphtha feedstock and energy costs”

25% increase in naphtha feedstock costs has not been passed on to ethylene prices, which have remained relatively flat

North West Europe, Naphtha Steam Cracking, Weekly, Contract, US dollars. Source: ICIS Margin Analytics

GAS PRICE SPIKES
Many chemical producers are energy-intensive so increasing gas prices will put upwards pressure on production costs for those which are not tied into long-term contracts.

ICIS data shows that the benchmark ICIS TTF front-month opened up by over 30% on Thursday morning at €119.9/MWh ($39.8/MMBtu) as Russia launched an invasion into Ukraine. Russian pipe gas flows were largely unchanged into European markets in early trade.

Europe depends for close to 40% of its annual gas consumption on Russian supplies, imported via four routes – Ukraine, Belarus-Poland as well as the Nord Stream 1 and TurkStream corridors linking Russia to Germany and Turkey via the Baltic and Black Sea, respectively.

DRUZHBA PIPELINE
Sanctions against Russia could cut supplies of crude oil through the Druzhba pipeline, threatening oil refinery operations and chemicals production at installations in Hungary, Slovakia, Czech Republic, Poland and the former East Germany.

Chemical production downstream of refineries in these countries could be impacted by any reduction in operating rates. ICIS data forecast that for 2022, 2.79m tonnes of ethylene (11% of total European capacity) and 2.34m tonnes of propylene (12% of total European capacity) are reliant on refineries located along the Druzhba pipeline. While some alternative sources of crude oil could be sourced, it is unlikely normal levels of operations could be maintained.