The recent fall in the oil price could lead to significant repercussions in the global petrochemicals industry, according to Wood Mackenzie. It said in a new report that Brent crude oil this week flirted with $30/bbl, having spent most of this year at around $60/bbl.
It said: “Ethylene lies at the intersection of many upstream raw material markets as it can be produced from a range of feedstocks such as NGLs, refined products, coal and methanol. Petrochemicals and more specifically ethylene are a tactical consideration in many company strategies to navigate the wider energy transition.”
Ethylene is the biggest petrochemical by both volume and value and a key driver of the industry’s growth, profitability and investment. Wood Mackenzie’s base-case global ethylene outlook over the coming industry cycle to 2025, can be summarised in one word – overcapacity.
This view is built around a large and sustained build of capacity relative to underlying demand growth levels. It said recent uncertainty from COVID-19 developments could exacerbate this situation “if demand growth under-performs our base case outlook, as the build of capacity is harder to slow down”.
In a period of overcapacity for a commodity like ethylene, it added that cost of production is critical: “Our view is that some ethylene assets would not make it out of the bottom-of-cycle conditions. The recent development of an almost halving of the oil price level is expected to dramatically alter the shape of the global ethylene cash cost curve. Near-term this surfaces in changes to regional market and asset competitiveness. Longer-term, if low oil prices were to be sustained, this would have the potential to alter structural investments in the ethylene industry.”
As part of the report, Wood Mackenzie generated two ethylene cost curves to highlight the changes from an approximately $60/bbl oil price environment to a $30/bbl oil price world and the impact this would have on global ethylene cost competitiveness.
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