Oil and Gas Prices Near 10 Year High
I suspect we will get a record price in the next week or two
When I started writing this newsletter I had no idea that I would be writing about how a Russian invasion of Ukraine is influencing oil and gas prices and ultimately will cascade into chemicals. There are Ukrainians who read this as my thoughts are with you and your country during this awful time. I’m not an expert on geopolitics or foreign policy, but I do hope that this war ends with the Russian military retreating. If anyone feels the need to try and help from the comfort of their home I would direct you to Unicef and their fund to protect the children of this conflict.
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Oil prices have skyrocketed and are about $109 per barrel right now for WTI Crude and $112 per barrel for Brent due in part to the Russian invasion of Ukraine. We are nearing the high that we saw in 2011. Oil prices were already climbing prior to the Russian invasion due to a variety of factors, but two important ones being decreased investment into developing additional oil fields and OPEC controlling production. If things continue the way they are I suspect that things will get worse for the chemical industry, which is still heavily reliant on oil as a feedstock.
With an increase in oil prices downstream oil derivatives also inflate in value such as ethene, propylene, butadiene, benzene, and more. A lot of the commoditized plastics and polymers are tied to the underlying commodity index pricing such as polypropylene or butadiene. As oil prices go up, it takes some time for the costs to be passed through the supply chain. Higher oil prices today mean higher prices in chemicals in a few months. If oil prices continue to rise there is going to be a lot more inflation in 2022.
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How are oil prices controlled?
In a sense it is supply and demand, but the supply can be altered. The Organization of Petroleum Exporting Countries (OPEC) essentially come together and agree to what they will supply to the world. Currently in OPEC the following countries belong: Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, IR Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. Note that the US, Canada, England, and European countries are not part of the organization.
According to the US Energy Information Association (EIA) OPEC member countries account for 40% of the world’s crude oil and their oil exports represent 60% of the internationally traded petroleum. The rest of the oil producing countries just have to deal with the situation. Back in 2016 OPEC decided to keep production rates high and caused the price of oil to drop like a rock (just wait till 2020), but it also made fracking for tight oil in North America very unprofitable.
Right now, OPEC is keeping oil production as planned while oil prices soar. The International Energy Agency met recently to ponder market intervention by releasing oil reserves onto the market. I suspect the most harsh sanction against Russia would be stopping the sale of natural gas exports from the country, but I don’t think Europe could handle the severe lack of heat at the end of winter. The company that built Nord Stream 2, the pipeline from Russia to Germany, was reported to be considering insolvency, which the company denies, but layoffs of all their employees have been reported.
If Russia maintains their unlawful occupation of Ukraine I predict that inflation will get significantly worse over the next 6 months unless oil and gas prices come down due to more supply. OPEC would have to increase production, but I suspect they will not. Chemical prices will get even higher and all of those cost cutting projects the chemists and chemical engineers in the audience will become even more important.
Chemical Operations Idling
Further, if you have suppliers or work with customers in Ukraine I think there will be significant disruptions for the foreseeable future. I’m sure there are a significant amount of chemical production and commodity plastics facilities in Ukraine being idled right now. Chemistry World has reported noble gas supplies will likely be disrupted. ICIS is reporting that the Kalush cracker in Ukraine is idled and that chemical commodity prices are climbing not just due to output, but lack of transport. C&EN’s editors covered the academic collaboration disruptions as well as companies like Enamine having to idle operations.