Fundamentals to pull back olefins margin taken from crude plunge

18:17 PM | March 9, 2020 | Clay Boswell

Plunging crude oil prices may provide some immediate margin relief to naphtha-based olefin producers in Europe and Asia, but weak fundamentals mean any gains will be short-lived, while ethane-based producers in the US and Middle East will only see their margins shrink, says Steve Lewandowski, vice president/olefins at IHS Markit.

“I think very short-term, products will parachute a bit as costs drop and prices hold, but fundamentals will ultimately kick in, and prices will fall as too much new supply comes on stream, far outpacing normal demand growth, let alone growth hindered by COVID-19,” he observes. “I think this is the same story on contract volume. Fixed prices of products in a falling market gain you margin, but that game ends once the new-month negotiation starts.”

Crude oil prices, already weakened by the economic disruption surrounding the COVID-19 outbreak, plunged Monday on the start of a price war between Saudi Arabia and Russia. US ethane prices have been close to the fuel value set by natural gas.

“The US and Middle East advantage on ethane feed is shrinking rapidly,” says Lewandowski. “For crackers in the US, heavier feedspropane and butanemay be better than ethane, as those will drop with oil, but ethane is already near the floor.”