Petrochemicals drive oil demand and boost global financial growth

Demand for naptha is likely to lead to demand for other petrochemical products. (AFP)

Demand for petrochemicals and a projected increment of 8.6 million tonnes per year in ethylene production is now driving demand for oil and contributing substantially to global economic growth, analysts said.

"A surge in petrochemicals demand and a steeply backwardated naphtha market suggest that, in the absence of major external shocks, a cyclical recovery for the broader economy is around the corner," Francisco Blanch, Head of Commodity Research, Bank of America Merrill Lynch said.

Historically, demand for naphtha, a key input in petrochemical production processes, has led demand for other petroleum products. It should be no different this time, Blanch said.

"With more demand and low refinery capacity utilisation, global naphtha stocks are drawing quickly. Currently at $2.10 (Dh7.71) per barrel, front-month NWE naphtha cracks are above the seasonal norm, and backwardation (spot prices higher than future prices) in naphtha and other petrochemical feeds such as propane or butane could continue in the near-term," Blanch wrote in his new report.

The demand for naptha, the fuel primarily used as a feedstock in petrochemical industries has continuously risen and there is a possibility that petrochemical producers can even use gasoil as a feedstock, Blanch said.

Shriharsha Pappu, petrochemicals analyst with HSBC said volumes of petrochemicals produced has registered a rise on growing imports from China. "Chinese net imports for petrochemical products registered a 12 percent increase month-over-month in November 2009," he said. "Volumes registered an uptick in January on rising imports from China."

Blanch blamed the faster- than-anticipated monetary policy tightening in China, a rapid widening of Greece sovereign credit default spreads, and increased regulatory uncertainty in the US financial sector for the recent fall in oil prices from more than $80 a barrel to the near $75 a barrel prices seen today. Oil was priced $75.14 a barrel yesterday.

But the physical demand for oil continues to improve, Blanch said. "While crude oil prices have fallen on the back of a risk-negative environment, we still see physical demand for petroleum products continuing to improve in the OECD," he said.

"The fiscal situation in Greece is no doubt concerning but our European economics team believes in a cyclical upswing in economic activity in Europe led by the need to replenish depleted finished goods stocks.

"Outside the OECD, particularly in China, demand has accelerated."

 

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