We are seeing some stability in ethylene and propylene pricing in the US to start the week, and with the steady rise in crude prices and the Monday jump in natural gas prices, this is not surprising. As we noted in yesterday’s Weekly Catalyst, there is enough incentive to export ethylene from the US to Asia – most likely Southeast Asia rather than North Asia, and this could offer support for those with surplus ethylene in the US today.
Spot prices for ethylene have surged in the US in the last week (chart below) – especially for delivery to Louisiana, where Westlake has a production outage. The price increase has completely removed the brief export arbitrage to Asia that lasted for a few weeks in late May and early June (Exhibit 5 in today's daily report). As we discussed on Sunday, ethylene is in a very wide no-mans-land in the US as it is not in sufficient surplus to drive pricing down to costs, and would likely be supported well above US costs and more by Asia costs in the current market, but if the market becomes short, buyers can pay a lot more for it as derivative prices are so high. If a PVC producer, such as Westlake, is buying, they can afford to pay significant premiums given that ethylene is less than 50% of the PVC molecule.
The US ethylene market strengthened slightly in early July, most likely because of supply disruptions as it is hard to see how domestic demand could improve from here. There is not much room to increase prices further if the export market is the balancing mechanism through July and August, as prices remain depressed in Asia and any arbitrage would close quickly if prices in the US moved any higher. Despite the rising NGL prices discussed in today's daily report and on Sunday, the US has plenty of margin left in ethylene, and prices could go lower if that is necessary to move additional volume. While we talk in the opening paragraph about increased inventories of finished goods in anticipation of the year-end holiday season and continued supply constraints, and how this is leading to a shortage of warehouse space, we suspect that everyone upstream of the finished good suppliers is also looking at adding or maintaining a larger inventory cushion than they have in recent years. We still believe that it is a tough call today as to whether you should sell surplus ethylene or store it as we head into hurricane season in the US.
The higher ethane prices and the sharp increase in 2Q is likely offering some support for ethylene, but the more likely leveling factor of the last week or so has been the Nova outage and any lost production at Westlake, which will have a direct impact on export availability. Until ethylene spot prices in the US approach costs, which are around 10 cents per pound based on ethane feed, the more important driver of pricing will be whether or not there is a surplus and if there is what price is needed to generate export demand. The US ethylene surplus is equivalent to a couple of large plants and consequently, the market can swing from short to long depending on who is operating and is very vulnerable to weather-related closures, although these often take down ethylene derivative plants as well, creating shortages of the derivatives. Polyethylene can afford to pay more than y twice the current price of ethylene, while the ethylene export market needs a further step down from here. Consequently, the range of potential volatility in 3Q is very high – we underestimated the weather impact last year, as did everyone else and it would be a tough call today for a producer with a surplus as to whether to push it into the export market or hold on to it. See more in today's Daily Report.