Hyde: Oil and gas market to remain volatile

There is a light at the end of the long tunnel, although it may take a good deal of time to get there.

In a nutshell, that's the prediction of Bill Hyde, senior director of olefins and elastomers for IHS Chemical Inc., as he looks ahead at oil prices, the oil and gas industry, and the return to normalcy.

Expect oil prices to be relatively volatile in the near term, but generally range bound, he said in a recent interview. “They should start to trend consistently higher in the second half of this year as production levels in the U.S. decrease and the market finally begins to pull down some of the inventory surplus.”

Relatively strong demand, “especially in the U.S. due to lower prices, is factored in our outlook,” according to Hyde.

He said the upward trend will be much slower than the downward plunge that put the oil and gas industry in the situation it finds itself in today. “As we move into the next few years, the upward trend will continue, though market volatility will be significant.”

In terms of the rubber industry, Hyde said demand for replacement tires in the U.S. should increase with more miles driven. Lower gas prices also should stimulate larger vehicle purchases so original equipment tires should be larger on average, he said.

“However, at the same time, low oil prices are also a factor in keeping natural rubber prices down, combined with surplus supply,” Hyde noted. “Weak natural rubber prices are one of the biggest reasons that global rubber margins are weak.”

In terms of synthetic rubber, he said producers have no significant pricing power as long as two dynamics control the market. The first is weak natural rubber prices; “the second is low operating rates for synthetic rubber due to overcapacity.”

Hyde said it will take some time, possibly several years, “before synthetic rubber margins strengthen to "reasonable' levels.”

Plummeting prices of oil during the last several months have affected energy, carbon black and synthetic rubber prices to varying degrees, said a spokeswoman for Vienna, Austria-based Semperit A.G. “As a result of that and due to weak demand overall, the raw material prices in our industry are at an historic low, which is, however, also reflected in the selling prices.”

She noted, though, that the weak euro partially offsets the raw material price decline.

Because of that, the spokeswoman said, Semperit views low raw material prices with mixed feelings: “a positive feeling because we can optimize our purchasing costs this way; and a negative feeling because they are a sign of continued weak economic conditions, which in some areas have a negative impact on our markets in the industrial sector.”

Low oil prices also are a double-edged sword, she said. On one hand, oil importing countries, regions and industries benefit from the low prices, she said.

On the other, she added, those prices cause a loss of revenue, “which in turn has a negative effect on investments, infrastructure expansion, imports and purchasing power. In Europe, the low oil price primarily has had a stimulating effect on the economy for now, but if the oil price stays too low in the long term, it is likely to put a brake on growth as orders from oil exporting countries will decrease.”

In terms of Semperit, with diversified global positioning in the medical and industrial sectors, along with “our powerful sales organization and proactive raw material management,” the company can balance out worldwide fluctuations in raw materials and currencies very well, the spokeswoman said.

Therefore, the company remains on track for growth “even in the turbulent times we are currently experiencing,” she said.

Despite the continued depressed price of oil, prices for some petrochemicals and feedstocks aren't necessarily following a typical pattern this year, according to John Calton, a market reporter covering petrochemicals in the Americas for the Platts business of McGraw Hill Financial.

One example is benzene, which last year saw prices go down as expected when the price of oil plunged, but that hasn't been as much the case this year, he said. That's because styrene—a derivative of benzene—has seen strong demand in the U.S.

The U.S. is a net exporter of styrene, and economic conditions have made it profitable since the end of last year for U.S. to send styrene to Asia, resulting in a tight styrene supply and strong demand for benzene.

“Styrene has been one of the only petrochemicals that has seen upward movement this year consistently,” Calton said.

And because of this tight supply, he said producers have been selling out of styrene months ahead of time. “We've seen forward selling in the styrene market before, but not to the extent we've seen in recent times.”

There's a difference of opinion on why this is happening, according to Calton.

Some observers believe it is because some styrene production is down in Asia for maintenance turnarounds, while others said it could be evidence of stronger demand from Asia.

Calton said prices for butadiene may be set to rise because supply in Asia also has tightened for that feedstock, making it attractive for the U.S. to export material there. “We typically don't see that happen,” he said. “Typically the U.S. is net short and imports butadiene from Europe.”

But the U.S. has ample supply currently, and there have been several shipments of butadiene sent to Asia. A few planned cracker outages in the second quarter will take some C4 crude out of the market. “That will mean less butadiene production, and that as well could tighten U.S. butadiene supply and support higher prices,” Calton said.