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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Two Industries Getting Slammed By Sky High Oil And Natural Gas Prices

A cross-section of Wall Street experts has been downplaying the recent surge in oil prices, saying that it’s unlikely to hurt the global recovery. One indicator that lends credence to this claim is the oil load, or the cost of oil as a proportion of gross domestic product. According to Morgan Stanley, the oil load--which is an indicator of the impact of oil on growth--is expected to reach 2.8% of global GDP in 2021, significantly lower than the long-term average of 3.2%, assuming an average oil price of $ 75 per barrel this year.

But that does not in any way mean that nobody is going to get hurt by the oil price trajectory.

Some sectors of the economy are feeling the effects of high oil and natural gas prices keenly, with businesses being forced to delay major projects or even close down altogether.

You can chalk up U.S. fertilizer maker CF Industries Holdings Inc. to the latter category. According to the Wall Street Journal, CF Industries has been forced to close two U.K. plants thanks to soaring natural gas prices.C F Industries, which uses hydrogen and nitrogen to make fertilizers and other products, said it has halted operations at its  U.K. manufacturing complexes due to high natural-gas prices with no timelines given when production might resume.

Businesses across the UK are feeling the full brunt of high energy costs, with the price of electricity nearly seven times as high as at the same point last year. Meanwhile, power markets in Germany, France, and the Netherlands are also sharply higher ahead of anticipated higher demand in the winter.

Natural gas prices have hit their highest levels since 2014, outpacing oil and many other commodities. On Friday, natural gas futures were trading up 1.9% to $5.37 per million British thermal units (BTUs), their highest settlement price since February 2014. Natural gas prices are up 121% in the year-to-date, while the biggest nat. gas benchmark, the United States Natural Gas ETF, LP (NYSEARCA:UNG) is up 101% over the timeframe. The sticker shock is even greater in other key natural gas markets around the globe, with the price for Europe’s regional gas benchmark, the TTF month-ahead contract, closing at a record-high $24.2 per metric on Wednesday, more than 5x year-ago levels.

A recent survey by Make UK has found that around two-thirds of British manufacturers say they are feeling the impact of energy price, a survey by Make UK, with energy-intensive manufacturing the hardest hit.

Trouble for Petrochemicals

They are not alone.

After a brief recovery after seizing the unexpected opportunity provided by the Covid-19 pandemic (which proved a double-edged sword) and an indulgent government that gave it an ‘open license to pollute,’ the tide appears to have turned against the petrochemicals industry--again.

Not only have plastic makers been facing growing competition as more refiners shift from gasoline and diesel to plastics, but now they are seeing a sharp contraction in profit margins thanks to higher naphtha and LPG costs--major plastics feedstocks.

Related: Europe’s Energy Crisis Is Driving Up Natural Gas Prices Worldwide

Petrochemicals--the building blocks of plastics--are processed from naphtha and LPG, or propane and butane. Companies with production units that are part of a larger refinery complex can tap on these raw materials produced on-site as a by-product of oil distillation, but everybody else has to procure feedstock from the open market.

The result: Standalone plants lacking a fully integrated refining system and ready access to affordable feedstocks are increasingly facing much higher production costs and could be forced to cut runs starting from the third quarter of 2021.

To make the situation even more dicey, Asia’s steam cracking capacity is set to increase by ~20% in the current year as per estimates by Armaan Ashraf, a senior analyst at FGE. 

Steam crackers plants turn naphtha and LPG into ethylene and propylene, the main building blocks for plastics. Meanwhile, a massive surge in natural gas prices as well as a huge ramp in petrochemical capacity in Asia, led by China, is not helping matters, either.

The shale boom led to an overabundance of cheap oil and natural gas, key commodities used in the manufacture of plastics both as feedstocks and as fuel. The fossil fuel industry has been heavily pivoting into the petrochemical sector as a second cash cow even as the world grew increasingly weary of its role in environmental degradation and investors started giving it a wide berth.

Indeed, the plastics industry was poised for an epic explosion--until the coronavirus crisis and the subsequent oil price collapse dealt it a potential death blow.

Last year, Time magazine reported that South Africa’s integrated energy and chemical giant, Sasol Ltd, opened a new plastic plant in Louisiana, one of seven such projects it had in the works, while Shell was is in the process of building a huge multi-billion dollar ethane cracker plant in Pittsburgh with the capacity to churn out 1.8 million tons of plastic each year. 

According to the American Chemistry Council, hundreds of new plastic production plants and expansions were given the green light last year. Global plastics production was set to increase by about a third over the next five years and triple over the next three decades.

But the energy and health crisis put paid to those plans and rosy projections.

In July, Thailand-based PTT Global Chemical announced that it will indefinitely delay its plan to build a $10B ethane-cracker plant in Ohio, citing uncertainty amid the health crisis, while Shell said in March that it was shelving its Pennsylvania project.

Meanwhile, China’s plans to invest $84 billion in plastic and energy investment in West Virginia are yet to materialize three years since the promise was made.

Kevin Swift, MD for economics and statistics at the American Chemistry Council, told Time that the oil price and economic crisis means that spending is likely to be severely curtailed. 

With Big Oil now shifting its focus from major investments to returning capital to shareholders in the form of dividends and share buybacks; the ESG boom and ongoing backlash against plastics in general, don’t expect those dazzling petrochemicals predictions to come to fruition any time soon.

By Alex Kimani for Oilprice.com

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Leave a comment
  • George Doolittle on September 19 2021 said:
    Along as all those nuclear power plants keep running I fail to see an economic crisis in any material sense of the term.

    Perhaps the Author is trying to explain the problem having all oil and natural gas *FUTURES* prices denominated in US Dollars? But even given that there are obviously still no shortages in the least of oil or natural "actual product" either with in fact the exact opposite being true in the USA.

    The USA doesn't even need a gasoline or diesel driven ICE Platform to run either mining equipment or even a Railroad...so again i reiterate my downgraded price target on oil in the futures market in the USA to "nil" at this time but again look forward to upgrading that price *as the futures price*(free electricity available in the USA for a BEV by way of example) going forward.

    Long Brunswick Industries
    Strong buy
  • Bill Simpson on September 20 2021 said:
    Make no mistake, and be warned. A shortage of either oil, or natural gas can cause their price to rise so high as to collapse the entire global financial system. That is because there will not be anything to replace the chemical feedstocks, transportation fuel, and industrial heating fuel obtained from oil ang gas for several decades to come.
  • John Craig on September 20 2021 said:
    George:

    You seem to think that the USA is a net exporter of fossil fuels. I am sorry to tell you that isn't the case. You have been fed the oil industry propaganda.
    You seem to think Nuclear is able to run the economy? Perhaps yòu are not aware that the product of nuclear power plants is electricity, which only accounts for approx 20% of energy used. And of that, the majority in the USA is generated by fosdil fuels. 80% of all energy consumed is fossil fuel energy for ICE mining, transporting of ores, mimerals and finished products, as well as high heat processes such as making lime for concrete, smelting of steel and other base metals other than aluminum. Electricity is way less energy dense and doesn't scale up to provide those services to the present economy. Perhaps if we degrow the economy by 50%, more nuclear energy might suffice along with other renewables, to provide the energy equivalent to run a 1900 economy.
    But if you want to be long Brunswick Industries go for it!
  • Kay Uwe Boehm on September 22 2021 said:
    Uranium price is no end cost factor special breeded and about 4Gt sea water uranium less 300$/kg is cheap additionally more thorium for breeding same easy U-238 with slow or fast neutrons for example in lithium-7 cooled and moderated HTR like fast Na breeder with secure bubble slow down never itself radioactive less neutron absorbing left for fission & breeding. Alone new CO2 turbines efficiency near 100% using cf compressor backflow cooling so all th. isolatable can double the amnount of electricity and halfing the electricity price.

    Also secure and cheap RBN Th pebble bed HTR with cubic boron nitride isitopes B-11 & N-15 + Th for 30 year runtime etc.

    Another energy solution cold fusion shooting Hg or protons into water side effect spallation of Hg to Hg-197 epsilon decay gold etc.

Leave a comment




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