Ripple effect

Author Toby Shelley

The impact of lower oil prices is not always obvious.

The impact of lower oil prices is not always obvious.

Lower prices stimulate demand — “Up to a point, Lord Copper”. So far, there is little evidence of crude buying rising on a halving of prices since late June. Nigeria, for example, is struggling to shift January and February crude cargoes and Chinese refiners are trying to re-sell crude they have purchased.

A world awash with crude may benefit tanker owners. Vitol and Koch have just fixed VLCCs on timecharter for one year, with an option for an additional year. Both may be planning to use the VLCCs for storage. BP, Lukoil, Noble, Shell, and Core Petroleum are looking for one-year floating storage deals although owners are likely to want $40,000/day so the economics may not yet be in place. But shipowners wouldn’t be shipowners if they didn’t have something to complain about. Some in the dry bulk market have grumbled about the speed of the fall in bunker fuel costs. They say charterers have demanded current bunker prices are used to determine the rate on a spot charter when owners fuelled their ship two weeks or more previously, paying perhaps $40/t over current prices.

But here’s another reason to be cheerful. From the start of this year, vessels travelling in dedicated emission control areas in Europe and North America had the limit on the sulphur content of their fuel cut from 1pc to 0.1pc, requiring a switch to burning more expensive marine gasoil for most. Parts of the industry fought tooth and nail for a delay, saying higher costs would drive small firms to the wall. With the dramatic fall in crude prices, fuel is now taking up a lower share of companies’ costs, and consolidation in the sector may be delayed. Good news for some but perhaps not for those that invested in technology to avoid the expected increase in fuel costs from the regulation change – emissions-cleaning scrubbers, new fuel-efficient ship designs or engines burning alternative fuels.

Jet fuel has comprised some 30pc of airline costs in recent years, a strong incentive to invest in new generation, more efficient fleets. But December jet fuel prices were more than 40pc lower year on year. Aircraft manufacturers are bravely maintaining that low oil prices will be short lived while energy-efficient aircraft are a long-term cost saver. But the Air France KLM group has already said it will postpone some deliveries. Some airlines hedge their jet fuel against crude. But the spread between jet fuel and crude has been wide and jet fuel has not fallen as much as some companies expected. Last month, Air France reduced its 2014 profit outlook for the third time, in part because it had hedged its jet fuel against Brent crude.

Low crude prices mean better refining margins, which mean better profits – except when they don’t. Feel for Moroccan refiner Samir, which boosted sales from its 220,000 b/d Mohammedia refinery by 15pc and saw margins rise in 2014 but was forced into a profit warning. The refiner is obliged to maintain a strategic stock of 4mn bl of crude, in addition to operating stocks, and the fall in the value of this inventory from July to early December means Samir will report a full-year loss.

Surely, lower oil prices mean lower feedstock costs for petrochemical producers? Yes, but it’s all a bit more complicated. The steep decline in European naphtha prices on the back of crude’s collapse has failed to prompt a significant rise in spot demand from Europe’s petrochemicals producers, because the fall in alternative feedstock propane’s prices has been even more dramatic.

Almost all of Europe’s ethylene crackers are maximising the amount of LPG they take as US exports soar and prices plunge. But not all. Some are tied to the requirements of downstream units that act as a constraint on feedstock flexibility, even if the cracker furnaces are able to make the switch. And there is still a maximum Europe’s crackers can take, even at any price. Increasing the amount of LPG relative to naphtha involves expensive adjustments to furnaces. Shell at Moerdijk, Total at Le Havre and Repsol at Tarragona have boosted their LPG feedstock flexibility.

Ineos at Grangemouth, Scotland, and Borealis at Stenungsund, Sweden, are looking at cheap US ethane as an alternative. But that’s a gift horse with teeth worthy of close examination. If low crude prices squeeze shale production and the US LPG export boom tails off, the economics of investment in import terminals in Europe may look less attractive.

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