Updated Sept. 19
Drone attacks on two of Saudi Aramco's facilities in eastern Saudi Arabia have resin sector analysts speculating on the impact on global resin prices, especially polyethylene and polypropylene.
Over the weekend, a number of companies announced feedstock supply disruptions as a result of the Sept. 14 attacks, which forced Aramco to reduce crude supply by around 5.7 million barrels per day, or about 50 percent of its total production.
Global oil consumption is about 100 million barrels a day.
Just three days after the drone attack, the Saudi energy mininister said the country would restore its lost oil production by the end of September. But the incident caused uncertainty on markets from oil, petrochemicals and plastics.
Key producers, including Saudi Basic Industries Corp.; Sahara International Petrochemical Co. (Sipchem); Advanced Petrochemical Co.; National Industrialisation Co. (Tasnee); Yanbu National Petrochemical Co. (Yansab); and Saudi Kayan Petrochemical Co., all announced "curtailment" of feedstock supply, ranging between 30 to 50 percent.
The Saudi situation "will clearly help the U.S. polyolefins business by making exports even more competitive," according to Robert Bauman, president of at Polymer Consulting International in Ardsley, N.Y.
"Volumes should increase, which is critical given the amount of new polyethylene capacity coming on stream in 2019," he added. "If Asian prices increase dramatically, the U.S. may even be able to export into China."
Bauman also said that if exports volumes increase and PE and PP operating rates are high, he would expect domestic prices to also increase.
"It's a sad commentary when disasters are needed to improve polyolefins performance," Bauman said. "In 2017 and 2018, it was Hurricane Harvey. In 2019 and 2020 it's the Saudi attack."
A key to the impact on the North American market will be how much crude oil prices rise, even though most commodity resins in the region are made from natural gas, not oil.
North American resin producers already have a feedstock cost advantage. The Aramco disruption could make that even more pronounced.
"This is a significant reduction in crude oil production that could have a shocking impact to all products if not resolved quickly," James Ray, senior consultant with ICIS in Houston, said.
"How high this will drive oil prices yet to be seen. Higher oil prices increase the U.S. shale oil and associated gas advantage globally, but passing on price increases is always a challenge and can temporarily reduce seller margins, while higher prices can dampen consumer demand."
Ray added that the further down the value chain a product is, the less impact crude oil prices have. In the case of U.S. PE resin, Ray said, crude oil has a very low correlation to the U.S. market price, because a large share of that price is margin.
That margin, in turn, is driven by billions of dollars of investments made to utilize low-cost ethane feedstock, along with supply and demand.
In general, Ray added, on commodity polymers, a $10 change in crude oil might drive an estimated 2-4 cents per pound change in market price, depending on the type of resin.
Joel Morales, who follows polyolefins at IHS Markit, addressed the pricing impact in remarks Sept. 17 at the SPE Annual Blow Molding Conference in Atlanta.
"For every $10 move in oil prices, that tells the naptha polyethylene guy he's got to raise his price 8 cents a pound just to keep his margin," Morales said. "So as a response we've already seen spot offers in Asia jump. They've come down a bit. We've seen one producer in North American already announce 8 cents a pound price increase for October, in additional to a 3 cent per pound increase."
Morales said some of the Saudi Armaco oil production was taken offline as a safety measure. "But we estimate that there's 3 million barrels a day that's down for a period of time, and the million-dollar question is, what's that period of time?" he said at the blow molders conference.
Polyethylene is an important resin for the blow molding industry, both for packaging and durable goods.
Phil Karig, managing director of Mathelin Bay Associates LLC in St. Louis, added that since the price of crude oil-based feedstocks often determines the break-even point for many high-cost global resin producers, feedstock-advantaged U.S. polyethylene producers should benefit from "a bump in exports."
"While the oil market can certainly recover from a short-term dislocation ... geopolitical risks are very likely to add a price premium to oil prices for some time to come," Karig said.
Karig added that U.S. PE makers should benefit from the opportunity to selectively increase prices if domestic resin capacity utilization gets tighter.
As the largest market for Saudi exports, Asia will feel the most pain.
"The immediate impact from [resin] suppliers to the Asia markets has been to withdraw offers that were in place before the loss of Saudi production," Nick Vafiadis, plastics vice president at IHS Markit in Houston, said. "However, most have refrained from offering new prices due to uncertainties around the magnitude and duration of the outages."
He added that IHS Markit is also still assessing the extent of the damage. Vafiadis said that it is important to note that Saudi Arabia represents about 9 percent of global PE resin capacity and about 6 percent of global PP capacity.
As a result, he added, any prolonged disruption — or any prolonged spike in crude oil prices — is likely to support higher resin prices.
At the blow molding conference, Morales said the drone strike marks the largest event ever, in oil production volume, in the past 50 years."Expect some volatility. We've lost a big chunk of the world's safety stock, he said.