Chicago — Oil prices are eventually heading north again.
And when oil increases, so does resin pricing.
Chris Gick, manager of industry and market dynamics with polyethylene maker Nova Chemicals Corp., can't tell you exactly when oil prices will start marching upward. But he knows they will increase and it's sooner rather than later in the grand scheme of things, he believes.
“We're getting to the point where [oil] production is getting quite close to demand,” Gick said at the recent Plastics Caps & Closures 2016 conference in Chicago.
“Once we get past the rebalancing, once production meets demand and once we work off some inventory, we're going to be back in a situation where people are going to be starting to demand higher prices in order to justify the investment in finding new sources of crude oil,” he said.
Oil and natural gas are feedstocks for virgin resin. When oil trades lower, resin prices fall. When oil prices rise ... well the picture is pretty clear.
“The big question mark is how long is that going to take?” Gick asked.
Oil prices have been down since late 2014 thanks, in part, the shale oil and gas boom. But as new domestic supplies were found, and prices fell, shale oil and gas companies were left in a bind. The lower prices they helped create eventually forced some to stop production, or at least defer new investment.
There is still excess inventory, which is keeping oil prices and resin prices lower.
“If we are rebalancing the second half of 2016, maybe it takes a year to 18 months to work off some of the inventory. So maybe we are looking at this time next year or 2018 when we see a price response to all of this,” he said.
Gick added, however, the outlook includes more than just a simple supply-and-demand equation. Production outages, geopolitical risk, oil traders' actions and OPEC's attitudes will all factor into how much oil will cost.
“Maybe another year or two years to move into that period where high prices are required for reinvestment. And then a period of generally upwardly rising crude oil prices with some volatility around that,” he said.
With a barrel of oil selling these days in the $40s, prices are still higher than when they fell to about $30 at one point last year and still much lower than mid-2014, when they were more than $110.
Oil prices are an important factor in determining the price of resins, but they are not the only factor, said James Ray, a senior consultant with ICIS, who also spoke at the conference organized by Plastics News.
Ray said the farther along the supply chain from the refinery, the less impact oil prices have on costs. That's because each step adds its own expenses to the mix.
“It gets down the value chain where the impact of the oil is increasingly insignificant. And that's because there's profits, there's overhead, there's logistics, distribution costs and things like that,” he told the crowd.
He pointed to the production of polypropylene as an example, indicating there are about four steps from refining to the creation of PP that add costs and impact pricing.
A report just out from the International Energy Agency indicated global oil demand is growing, but at a slower rate than previously anticipated.