The Domino Effect: Insights on Oil Prices Impact on Petrochemicals

The Domino Effect: Insights on Oil Prices Impact on Petrochemicals

The oil and gas industry is no stranger to world economic turmoil; and recently it has brought the industry to a whole new low. Global oil prices crashed down with Brent crude recording $20.39 on April 21 as a result of the coronavirus pandemic, which in turn has led to an imbalance in the global oil supply and demand equilibrium. This has created a domino effect impacting the global oil industry and, consequently, affecting the petrochemical industry.

A Causal Relation

In Egypt, petrochemicals are an intrinsic asset of the oil and gas industry, as the country is leading Africa’s oil refinery industry with a total of two operating refineries and an annual total capacity recording 38 million tons (mmt) in 2018. On top of that, investments in Egypt’s petrochemical industry from Fiscal Year (FY) 2014/15-2018/19 have amounted to $5.65 billion, according to Egypt Oil & Gas’ (EOG) Research and Analysis February 2020 Report.

It is undeniable that the rise and fall of oil prices have always been integral and intertwined with the petrochemical industry. That is because crude oil and its derivatives serve as feedstock for petrochemicals, so it makes sense that the highs and lows of crude prices will have an impact on production, investment, and financial decisions of petrochemical companies.

Despite the current challenges, Bloomberg’s article entitled, The Changing Winners and Losers From Oil’s Historic Plunge, noted that Egypt will benefit from the grave drop in oil prices, as Egypt is not only an exporter of crude oil but an importer as well and the lower prices will support government finance.

Nonetheless, the destabilization in the global oil market will certainly take its toll on certain areas when it comes to Egypt’s economy, but not to the oil and gas industry. Medhat Youssef, the former Vice President of Egyptian General Petroleum Corporation (EGPC) told Al Wafd that the ongoing price war will have a positive impact on Egypt because the country is not just an oil producer, but an importer as well. Not to mention that it will improve the form of the balance of payments and improve the trade deficit.

A Window for Opportunity

The global oil supply and demand equilibrium has been unbalanced since the beginning of the COVID-19 crisis. That is largely as a result of China’s lockdown, considering that it was the biggest importer of crude oil in 2019 by importing approximately 22.6% of the world’s crude oil with an estimated value of $238.7 billion, according to data from World’s Top Exports on April 23. This consequently resulted in an oversupply of crude oil and petroleum products and has affected the entire industry. Albeit, a financial analyst expert told EOG that, “the oversupply issue will not be applied to Egypt’s [situation] as we are still a net importer country, so I believe that we still have not reached the breaking point of the supply versus demand.”

Mohamed Farghaly, Independent Energy and Business Strategy Consultant, echoed the sentiments noting that lower oil prices will reflect positively on Egypt’s economy. “[Petroleum] products demand will recover probably in the near future and Egypt will become a net importer of crude oil again. The government is planning to increase its crude oil and product storage capacity to take advantage of the current low oil prices,” said Farghaly. He advised that the dwindling oil prices represent an opportunity for economic development and that the government should develop trading skills and hedging expertise to capture future contracts’ low prices.

As the petrochemical industry is closely related to refineries, Egyptian refiners have taken a hit mainly due to lockdowns in several countries. However, refiners can still take advantage of the low oil prices. Farghaly pointed out that there are myriad opportunities that refiners can benefit from. “[Refiners can] untraditionally increase their storage capacity outside their boundaries, [or] rent un-utilized storage capacities available in the hydrocarbon sector, inside and outside Egypt.”

Additionally, with low oil prices, Egyptian refiners can seize this chance and put Egypt on the map as a regional energy hub. Farghaly touched upon that topic saying that, “[Refiners could] diversify their markets locally, in Africa and elsewhere.” As a result of the global lockdown, refiners should seek ways to optimize its operation and increase its operational flexibility and upgrading capabilities, noted Farghaly.

A Rippling Effect

Even though the COVID-19 crisis might have severely affected tourism and aviation sectors, against all odds, the petrochemical industry has managed to thrive. According to a Pharos Holding’s report on Egypt’s petrochemical published by Mubasher, Egypt’s petrochemicals producers have had a stable first quarter in 2020 with no damage to the export sector. Additionally, the industry has witnessed a surge in national demand since the beginning of the crisis, as demand on chlorine and caustic soda – chemicals used in manufacturing cleaning products – has risen. Additionally, companies that rely on polypropylene – an oil derivative – are expected to decrease their prices as polypropylene is linked to the global oil price, which would benefit consumers.

Nitrogenous fertilizers, which have oil-based components, have also kept their ground amid the crisis as food security becomes an increasing necessity amid the pandemic. “One of the most powerful solutions to absorb the saturation of natural gas in the Egyptian market is to convert a large part of it to fertilizer industries, as it is related to food security,” suggested Haidy Riad, Economic Researcher at the Ministry of Planning and Economic Development.

There is no doubt that global lockdowns, low oil prices and the lack of storage spaces would take its toll on petroleum exports. Farghaly noted that, “one lesson learned from COVID-19 crises is the importance of the local market, besides export, for the petrochemical sector. Products for the local market industries such as polypropylene, sulfur, and fertilizers can offset the decline in export due to COVID-19 problem.” Farghaly explained that one of the valuable outcomes from such a crisis should be reliance on the local industry instead of exports.

Relying on national products and minimizing imports will only mean a more prosperous economic status for Egypt. Riad concurred with Farghaly noting that “the petrochemical industries like the manufacture of car tires, have to be manufactured locally instead of importing them from abroad,” stressing on taking advantage of the low natural gas prices to limit Egypt’s imports.

The Future of Petrochemicals

A financial analyst, who asked for anonymity, told EOG that, “given that Egypt’s cost of oil production is relatively low, [the petrochemical industry] will remain an attractive market but [one] has to take into consideration the high barriers to entry for new companies that wish to invest in oil and gas.” Since the petrochemical industry is considered a liaison between various key industries, it is bound to have an investment rush with the current market condition. Riad reckons that “falling crude oil prices are likely to boost the petrochemicals industry, offering great investment opportunities.”

Ultimately, the current market offers a valuable opportunity to the petrochemical industry. According to the 2018’s International Energy Agency (IEA) Report on the petrochemical industry, petrochemical feedstock accounts for 12% of global oil demand, and this share is expected to increase as demand for plastics, fertilizers, and other petrochemical-based products increases. So it is evident that demand for petrochemicals would not be hindered anytime soon. Also, with the drop in oil prices, this could be the stepping stone for a booming petrochemical industry.


Welcome! Login in to your account

Remember me Lost your password?

Don't have account. Register

Lost Password