One of the major oil and gas predictions for 2017 is a global ethylene shortage, as supply fails to keep up with growing demand.
Ethylene is a raw feedstock for plastics.
Cracker units use natural gas as a material to produce ethylene, which is then converted into plastics, such as polyethylene. Both the -oxide and -glycol variants are important reactants in manufacturing. This includes plastic films, fibres and resins, as well as antifreeze agents for water-based coolants. The growing global demand for antifreeze agents is one of the leading drivers of market growth. Sources of demand include the automobile sector, industrialisation, new infrastructure projects, and changing lifestyles in emerging markets.
The petrochemicals market in 2017
Volatility in the oil and gas market is driving uncertainty in the chemical industry. Oil supply has increased faster than oil demand growth over the last few years, as suppliers battle each other for market share. The relatively cheap feedstocks (oil and natural gas) have lead to major investments in new capacity, across a range of chemical products. However, these decisions have not been made quickly – as many investors waited to assess market conditions.
As a result, some issues have arisen in supply and demand. Nowhere is this starker than for ethylene, where tight supply could drive up US prices before anticipated capacity additions come online.
Ethylene market outlook
In the medium term, four new US crackers are scheduled to begin operations in 2017, with an additional idle unit restarting. This should expand US ethylene capacity by over 5.4m tonnes/year. However, chemical plant construction has a tendency to fall behind schedule, and some commentators believe that the current start dates are ambitious. They may fail to take into account the likely delays in commissioning and operation ramp-up.
In the short term, tightened supply could cause ethylene prices to climb. Market watchers do not expect the US market to see the impact of increased ethylene capacity until Q4 2017, which means two to three quarters of constrained supply. Following high operating rates in 2016, several crackers are also scheduled to shut down for maintenance in the Q1, compounding the problem. Meanwhile demand, both domestic and export-driven, is expected to remain strong. According to the Global Ethylene Oxide and Ethylene Glycol Market 2016-2020 report by Research and Markets, the global ethylene oxide and ethylene glycol market will grow at a CAGR of 5.8% during the period 2016-2020.
We have already seen firmer prices in 2017, as market participants moved to increase stock for the upcoming turnaround season. This is following the annual end-of-year inventory offloading (for tax purposes).
The price of oil
As outlined in a recent Wood Mackenzie report, fluctuations in the crude oil price are also driving uncertainty. The ongoing decline in oil production and recent demand growth will likely result in a supply gap – pushing oil prices higher. Costs are therefore expected to increase, particularly for feedstocks, which may put further upward pressure on ethylene prices. If crude oil prices remain low, cracking of heavier crude oil fractions, including butane and propane, may become more common – especially in the US.
Either way, the market is now facing a shortage.