An extended recovery period for crude oil prices, exceeding five years, would have dramatic implications for the global petrochemical industry and could mean a “Back to the Future” experience for some companies and regions -- creating a more competitive environment for naphtha producers, according to a new IHS report.
London—The IHS Chemical Crude Oil Turmoil and the Global Impact on Petrochemicals Special Report assesses the potential market and economic implications of three possible, short-, medium-, and long-term recovery trajectories for crude oil prices to help petrochemical producers address their investment planning in the midst of significant market volatility, and a higher degree of uncertainty regarding the role of OPEC in managing the global supply of crude oil.
“Oil price volatility is creating a nightmare for companies planning investments,” said Don Bari, vice president, technology and analytics - IHS Chemical, and an author of the report. “The long-term recovery case, should it come to fruition, has the most significant implications for the market. Since oil dynamics drive marginal production cost and price-setting mechanisms for many chemicals, plastics and fibers, a prolonged oil-price recovery could shift the feedstock advantage from ethane and back to a more cost-competitive naphtha. Much like the DeLorean time machine from the 1985 film — ‘Back to the Future,’ naphtha would be the conduit taking us ‘back to the future,’ similar to the industry experience of the late 1980s.”
Economists Expect Moderate Growth
In the case of a long-term oil price recovery (exceeding five years), IHS economists, would expect moderate economic growth to continue for several years, along with slower oil demand growth. At the same time, technology would continue to reduce oil production costs and increase supply, even at lower oil prices. Long-term, continued global oversupply of crude oil could keep prices from recovering to trend for more than 10 years, the IHS report said.
The outlook resulting in a longer-term oil price recovery is not particularly rosy, and the short-term view is also complex. In the near-term, energy experts at IHS say economic and geopolitical risks continue to challenge oversupplied oil markets, and crude oil prices are posed to drop further.
In an IHS Energy research note on crude oil production and prices issued 30 July, 2015, IHS Energy researchers noted that since the oil price collapse, global oil production has gone up, not down. Indeed, since the fateful 27 November 2014 OPEC meeting, aggregate production from the United States, Saudi Arabia, and Iraq has increased 2 million barrels per day—far more than global demand. Oil markets are increasingly glutted.
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