As the ratio of pricing between Brent crude and US natural gas rises, the US ethylene cost advantage is spiking, and as long as the US is producing enough natural gas to feed domestic demand and allow the LNG facilities to run at capacity, the advantage can remain. This gives the US a significant cost advantage and assuming that there is spare capacity the US industry can step up and support Europe if needed. However, it is not clear that there is much spare capacity, either in the production units or in the logistics to get the product to ports or across the Atlantic. There is a surplus of liquid and gas carriers today, but the container problems are global and the inflation and supply chain issues that we seem to be stuck with are likely to keep containers tied up in excess inventory that consumers will want to keep building as a cushion for a less certain supply outlook. The shipping issues are only part of the problem for Asia, as even with better opportunities to export, the region is seeing escalating production costs because of the movement in crude oil and naphtha pricing. We are in an unusual position where strong demand in the US is keeping domestic prices higher than in Asia, despite costs in the US that are low enough, especially for polyethylene to move material to Asia at costs well below the cost of manufacture in Asia. This dynamic can last for a lot longer in our view as long as oil prices remain elevated versus US natural gas. An abrupt turn will occur if US natural gas production falls below domestic demand and LNG demand – this would cause a spike in US natural gas prices. For more see today's daily report.
The US petrochemical production cost competitive advantage reflects a sharp decline at the feedstock level. Natural gas and natural gas liquids prices have risen faster than crude oil and Ex-US naphtha values since mid-1H21. In yesterday's report we identified the disconnect between propane and ethane pricing in the US. While both are high, propane is so high that it is now unprofitable to make ethylene from propane instead of just less profitable. The direction of the lines in the exhibit below shows the changing landscape clearly, and the only reason why the US chemical industry is so much more profitable than the markets in Asia is that chemical product prices are so robust, in part because of the high cost of freight between the regions.
The slow decline in the oil/natural gas ratio that has persisted through the year continues – this time oil is falling faster than natural gas as both are reacting to slower demand or expectations of slower demand. We are unconvinced that the price declines will continue, but it is much less clear which direction the ratio will move. OPEC+ has far more chance of keeping cash flows high by trimming volume to balance the oil market and the overwhelming strategic logic of such a move means that it is a likely path – there is no 10-20% boost to demand to be found by lowering prices. US natural gas is still on a medium-term demand march higher in our view and more limited E&P spending should keep the market balance quite tight. There are no near-term large increments of new LNG capacity on the horizon and consequently, inventory and pricing will likely bounce around on weather changes for a while. See more in today's daily report.