An Outlook on how Oil Prices have Impacted the Petrochemical Industry
Oil prices have a startling effect on the market because they pose a high impact on the entire value chain. Demand and supply are hampered at every stage, from production to transportation. When we look at the historical data, we can see that there have been a lot of changes and sincere outbreaks. However, there have been some significant changes that, when they occurred, changed the face of industries, particularly petrochemicals.
Let’s examine how and when these price reductions occurred, as well as their effects on the sector and, later, supply and demand.
How Oil Price Curve have Moved Over Time?
Since the late 19th century, there have been sporadic fluctuations in the price of oil. The significant declines happened in the years 1997, 2008, 2014, and 2020. There were many causes for price drops, including but not limited to the recession, social and political wars, medical pandemics, etc.
Prices began to decline in the recent past around the year 2020, and ever since then, they have been trying to catch up. The recent conflict between Russia and Ukraine has put additional pressure on the market. Although the global oil market has not experienced positive growth, demand is anticipated to increase slightly as 2023 gets underway.
Only a few regions, like Libya and Saudi Arabia, have experienced a significant increase in production. China is one of the world’s leading oil importers. Due to a variety of factors, the nation’s recovery status has been steadily declining over the following years. Since February of this year, the ongoing conflict has been to blame for the deflation in prices. As a result of the conflict, Russia’s oil imports to many different regions have dropped sharply.
Different approaches and strategies have resulted in the losses. Oil is entering the market, and industry growth for 2022 looks promising. It makes sense that Russia’s oil exports to countries with economies like the US, Japan, and Korea have decreased. These shipments, however, are now being diverted to countries like China and India, among others, and this has proven to be a significant factor in reducing the losses.
The Price Outbreak and its Effect on Petrochemical Industry
When oil prices decline, the upstream market of the petrochemical industry is significantly impacted. This is due to the fact that although the price of oil changes, the costs of production do not. Due to the final consumable product’s ability to be sold at a desirable price, the same situation doesn’t have a significant impact on the downstream market. However, when it comes to products for end users, price parity is in every way important. The mechanisms for deciding these are in any which way hampered as downstream markets use the chemicals produced upstream.
A large supply and demand gap could, however, result from these price changes. Since the producers do not receive any profit, there is a good chance that the products won’t move further along the supply chain. Thus, in a sense, the petrochemical industry is driven by oil prices. The IEA predicts that in the following ten years, the petrochemical industry will double global oil demand. This makes it abundantly clear how completely intertwined these two industries are.
The disruption to supply chain management is another effect of the change in oil prices. Due to restrictions and lockdowns, businesses used various techniques to combat the 2020 price drop. However, in 2022, the industry as a whole has once more been impacted by the war and China’s ongoing lockdowns.
Another sector affected by this was real estate, which impacted the demand for paints and coatings. The stock market is hampered by oil prices, which might be the cause for inflation. For instance, the stock price of Exxonmobil, a significant integrated oil company, fell by almost 8%. Again, in some ways, the supply-demand gap is caused by companies ceasing or slowing down production or other operations to cover losses.
The sustainability impact that the businesses have been experiencing and promising to experience must be kept in mind. Many things have changed over the years, and businesses are starting to focus on lowering their carbon footprint. This demonstrates how the petrochemical industry will undergo a slow but sure synergy shift, for any of the plausible reasons. Companies must also be prepared for M&A, integration, portfolio restructuring, and other events.
In a Nutshell
Organizations need to be more ready for these changes in the price of oil. Considering the COVID-19 pandemic and the ongoing conflict, planning the risk portfolio can be highly beneficial to the petrochemical industry. Dealing with market volatility may be best accomplished by concentrating on cost reduction, fostering process agility, establishing strategic and integrated partnerships, etc.