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High crude oil prices and refinery margins have increased prices of petroleum products to record highs. Annual
average crude oil price has exploded over a vast range in the last decade, from a low of US$12/barrel in 1998
to the present highs yo-yoing between US$90-99/barrel. Many industry sectors have experienced a dramatic increase in operating
costs as energy and raw material costs escalate. The petrochemical industry has been particularly hard hit due to
its reliance on key petroleum based feedstocks. Naphtha prices have increased more than three folds over the last
five years, recently breaking through US$800/MT � pushing feedstock costs of a typical naphtha cracker above
US$2000/MT of ethylene.
The petrochemical industry has been successful in passing through the recent feedstock cost increases in an efficient
manner, maintaining strong profitability; as per a report published by Nexant. The cost of acquiring crude oil is the
primary driver of petroleum product pricing and has a fundamental influence on refinery profitability. The global
refining and petrochemical industry are currently exposed to an environment of increasingly volatile crude oil and
energy markets. Major uncertainty from many sources including political, market, technological and sociological
renders attempts to forecast a single definitive future of crude oil markets and the refining industry futile.
The market is not expected to sustain average crude oil prices at the current record peak in the long term. High costs
will eventually erode demand whilst very lucrative margins would encourage major investment in new production. Crude oil
price will ease in the future, but it remains uncertain as too how quickly and by how much it will fall.
Three alternative scenarios have been developed, each of which would drive very different long term out looks for
relative crude oil prices. The average prices over the scenario period in current dollars for Brent FOB crude oil are:
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High oil scenario: Average US$65.6/barrel (2008-2030) |
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Medium oil scenario: Average US$45.6/barrel (2008-2030) |
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Low oil scenario: Average US$29.8/barrel (2008-2030) |
Global refinery margins climbed to a peak in the early 1990s as the Gulf War raised fears of supply restrictions to
refined products. A slowing global economy depressed demand growth though the mid-1990s, while investment in new
global refining capacity lengthened the supply base. Long refined product markets depressed refinery margins to a
prolonged trough which was sustained for almost a decade. Global refinery margins have strengthened considerably since
2002 as rejuvenated Asian demand, led by voracious demand in the surging Chinese economy, has supported strong growth
in global demand for petroleum products. After a decade of low returns, which deterred investment in new global refining
capacity, refined product markets moved back towards balance. Refinery margins climbed to a peak in 2005 as petroleum
markets tightened considerably. Heavy demand, particularly for gasoline coincided with extensive storm damage to
refineries in the United States which severely restricted the supply side.
Demand for petroleum products, especially light distillates has thus far remained robust despite relentless price
rises as crude oil costs are passed through to consumers. United States gasoline consumption continues to be
strong, with imports required from Western Europe and Asia to meet demand. Global refinery operating rates have
remained very high following many years of restricted investment in new capacity in developed economies. Extreme
tightness in global petroleum markets is expected to maintain strong margins through 2007 despite the exceptionally
high cost of acquiring crude oil.
Margins are expected to ease from their current peak over the next five years. Global refined product markets
will support average margins considerably higher than the average achieved over the last decade. With global light
oil product demand forecast to rise faster than residual fuel oil use, trend-line global upgrading margins will
settle above the deep trough of 2002, but below the peak experienced in recent years.
Refined product prices have very closely followed volatility in crude oil prices. Whilst crude oil prices
have explored a vast range, the ratio of given refined products relative to crude oil has been constrained
to a narrow band. Refined product prices will to continue to follow the trajectory of crude oil prices.
Petroleum markets are not expected to be able to sustain prices at current record highs in the long term.
Under the medium crude oil scenario, prices of crude oil and refined products are expected to remain firm for
another year, preserving the peak built up through 2006 and 2007. Beyond 2008 petroleum markets enter a transition
period through which prices steadily ease to adopt a long term trend price by 2012. Post 2012, prices of refined
products will reflect changes in the underlying cost of acquiring crude oil, which are expected to grow modestly as
low cost wells are depleted.
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