Itasca, Ill. — The plastics industry can expect to have relatively low oil prices for the next two or three years as demand catches up with supply, but there certainly could be periods of volatility, says an official with Nova Chemicals Corp.
Chris Gick is manager of industry dynamics for Nova. And that means part of his job is to analyze the oil industry, read the tea leaves, keep his ear to the ground and figure out what's going to happen in the years ahead.
“The bottom line is there's a lot of uncertainty, a lot of different opinions about what is going to happen,” he said at the recent Technology Forum held as part of the Plastics Caps & Closures conference in Itasca.
“On the bearish side, we really have a fundamentals issues, right? There is an excess of supply relative to demand. And that excess is about 2 million barrels per day or more. Probably 2 [million] to 3 million barrels per day, according to most estimates,” he said.
“That is about two years demand growth,” Gick said.
Demand for oil increases about 1 million to 1.5 million barrels per day per year typically, although that number has been a bit higher this year.
“So we have about a two-year overhang of production relative to demand. We also have very high inventories. One of the indicators of the market that people look at generally is the inventories,” he told the crowd.
“In addition of that excess of supply over demand, we have an excess inventory and when you look at the fundamentals you can fairly easily get yourself in to a position where you can see it's going to take maybe two or three years to rebalance if there's no change in production from the current level,” he said.
“On the more bullish side ... perhaps the biggest factor here is a significant reduction in investment. That's ultimately going to lead to lower production growth. Does it mean no production growth or negative production growth? That's a big question mark. Here in the U.S. it might mean that,” he said.
But, he added, there are other places around the world where we might see production growth. “So it's not a given that production is actually going to decline,” he said.
“It's very uncertain as to what the production growth will be like in the future. And that's one of the key uncertainties in terms of figuring out how long the market is going to take to rebalance,” he said.
Demand is not the only issue that impacts oil prices, Gick said.
“We have action of traders that move in and out of the market, he said. “And that tends to move the prices around. ... That can move the market quiet significantly in one direction or another despite no change in the fundamentals and sometimes it's just very small things that trigger those changes.”
Also, one driver of recent lower pricing has been shale oil production. But according to one estimate, Gick said, output from that source is expected to plateau in 2018.
“Bottom line, I think we're probably in a situation where we will have crude oil prices that are going to be low for maybe another two years or, perhaps, three,' he said.
But those prices could see volatility do to a variety of factors, including problems in the Middle East, traders moving in and out of the market, or even just speculation.
“Eventually, though, the price is going to be set by reinvestment economics. It's really just a question of time,” he said. That means the price of oil will be determined by how much it costs to reinvest to keep the business operating.
“And reinvestment economics today, we probably would think the kind of price level that we would need to get to is maybe at least $80 per barrel or maybe somewhere closer to $90 or $100,” he said.
The forum was organized by Nova Chemicals in conjunction with the Plastic Caps and Closures 2015 organized by Plastics News.