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The petchems double dip: How big is the threat? And will the industry avoid it?

By Shahrin Ismaiyatim

November 4, 2010 - For watchers of global economic developments, the second half of this year has been sending out mixed signals.

Against widespread signs of improving growth -- and especially, the continuing boom in Asian economies -- are such indicators as the recent dismal housing figures in the US and UK.

Factor in the weak dollar and the possible need for more stimulus packages and you have renewed fears that the global economy is heading into the dreaded double-dip recession.

As the petrochemical industry is a bellwether of economic performance, is the industry facing the inevitable? Will the second wave of Middle East capacities push the industry over the edge?

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As if shrugging off the memory of when the petrochemicals industry experienced the worst fall in demand and prices in the past 10 years, if not in its history, the industry has staged a modest but steady recovery in 2010 from the depths of December 2008-January 2009. (See related chart: Petchem prices recover over 50% since 2008 crash: September 2008 - September 2010).

Then, the Platts Global Petrochemical Index, a proxy measuring the collective price of petrochemicals, recorded an abysmal price of $491/mt on December 5, 2008, a whopping fall from $1,679/mt recorded on July 14 of the same year.

As we head into the fourth quarter of 2010, the PGPI has recovered over 50% of the value it lost since that plunge and signs are encouraging that it will maintain these current levels to the end of this year.

Despite a difficult two years when industry consolidation took place at lightning speed, the industry has shown its resilience and has quickly got back on its feet.

Crude oil to hit $95/barrel?

The bullish pricing outlook is not merely reserved for the petrochemicals market.

Crude oil analysts see the price of the black gold reaching as much as $95/barrel by the end of 2010, exceeding any levels seen so far this year.

In its Energy Weekly report published on September 13, investment bank Goldman Sachs quoted data showing that the strong oil demand from China in August, slowing inventory builds in the US due to weaker imports and stock draws from floating oil storage have suggested that “world oil market conditions are far more constructive than conditions in the US oil market suggest.”

“Heading into the Fall (Autumn) of 2010, these reports give us increased confidence that the tide will soon be turning in the US oil market, and we continue to expect WTI crude oil prices to move into an $85-95/b trading range,” said the banks analysts David Greely and Stefan Wieler.

Brent breaks $85/barrel on weak dollar and strong futures

Meanwhile, the European physical crude oil benchmark Dated Brent broke the $85/ b level on October 6, closing that day at $85.19/ b, Platts data shows.

At time of press, this level was just $1.60/ b shy of the year high on April 26, when the market was assessed at $86.79/ b.

But several analysts said there were many supporting indications that the physical crude oil price would close at the highest level by year’s end.

The value of Dated Brent, representing the lowest priced grade of Brent, Forties, Oseberg and Ekofisk, loading 10-21 days forward in the North Sea, has been pushed up due to a combination of the weak dollar and the strong futures price, market sources said.

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