Fall in naphtha prices expected to exert pressure on margins of shale-based production

16-Dec-14

The petrochemical industry got a taste of what could be a potential shift in petrochemical profitability during the last quarter as crude prices – and, in turn, naphtha prices – tumbled, according to a Platts report.Although the falling energy prices do not directly impact the cost of making ethylene from low-cost, shale-based ethane in the U.S., the falling naphtha price is expected to put a pinch on the shale-based production margins, as the values of ethylene and polyethylene fall globally. Polyethylene (PE or polythene) is the world's most widely used plastic, primarily used to make films used in packaging and plastic bags. PE production consumes more than half of the world's supply of ethylene. The falling naphtha price will make olefins supply from the rest of the world more competitive, as naphtha is currently the feedstock used to produce 44% of the world's ethylene. The latest Global Polyolefins Outlook shows that the influence of naphtha prices on the plastics market is expected to shrink slightly during the next decade, with naphtha used for only 41% of global ethylene production in 2024. "What we are seeing now is more of an anomaly," said Jim Foster, director of petrochemical analysis at Platts. "For this to be a sustained trend, there would need to be indications that the crude oil and naphtha prices would remain below $70/barrel for an extended period of time. A lot will depend on how the tight oil producers in the United States respond to these low crude oil prices."