Blogs and Presentations

March 11, 2020

Crude oil continues to underpin most energy intensive sectors

Crude Oil

Despite the welcome rise in renewable power generation and alternative fuels, it remains the case that crude oil underpins most energy intensive sectors of the global economy. This importance gives a direct linkage between oil prices and the relative economic prospects for the various players in the industry.  In the petrochemical sector oil prices play a key role supporting general prices levels through the influence of refinery sourced feedstock costs.  This influence directly impacts on cost competitiveness and the relative economic fortunes of the industry.

It is well recognised that spot prices can be volatile, and extreme price falls have been seen during times of fear and apparently non-stop increases during periods of optimism and perceived supply shortage. The falls can exceed 15 percent in a day and the gains consistently achieve an average of six percent per month over a six month period as seen in the period leading up to July 2008.  What is less well appreciated is the wide range seen in even annual average crude oil prices in the past 25 years, from a low of US$13 per barrel in 1998 to a high of more than US$110 per barrel in 2012, and more recently back to US$43 in 2016 then up to US$64 in 2019. 

March 9th [2020] saw the latest major collapse in oil price as oil producing countries in the informal OPEC+ organisation failed to agree a strategy to support pricing levels given the current global supply glut caused by ever increasing output from US shale, and now exacerbated by the impact of coronavirus on industry supply chains.  It is not yet clear whether this is a temporary collapse in crude oil prices, or if it represents a fundamental reset of the price levels.

Uncertainty in crude oil markets creates difficulty assessing the long term outlook for prices which are essential for evaluating investment options.   Nexant has developed a proprietary simulation model of the global petrochemical industry, the Petrochemical Simulator.  The simulation model is used to forecast petrochemical consumption, production and trade for all global countries or trading blocks for decades in outlook, and prices by detailed assessment of cost and profitability drivers.

Using this tool clients have the opportunity to evaluate a LOW LOW scenario to help understand the impact of any prolonged lower oil price on current investments. Clients are invite to use Nexant’s robust price forecasting methodology to generate customised forecasts. Inputs including energy prices, GDP outlook and operating rates can be made client specific.

Find out more:

For further information regarding the Petrochemical Simulator, please contact aibbotson@nexant.com or download our Markets and Profitability brochure.

Author:

Alastair Hensman, Vice President – Nexant

For general enquiries click here