Saudi's Ministry of Energy has instructed Saudi Aramco to supply 12.3 million barrels a day of crude to the market in the coming months.
Oil prices have been plunging ever since Saudi Arabia planned output hikes after Russia refused to support deeper oil production cuts.
As the Saudi-Russian price war showed no signs of abating, Brent Crude oil prices plunged to record levels and were last trading near the $23-per-barrel- level at the end of March, down from $51 per barrel in the beginning of the month.
According to Ozeir, the petrochemicals sector has been put under immediate pressure.
“Whether it is the availability of shift-based operational staff, the imports of critical equipment and services, or the downstream sale and disposal of products, as a 24x7 process industry, the petrochemicals sector is reliant on continuous and global supply chains,” he said.
“Furthermore, the chemicals sector is highly exposed to key end markets such as automotive, oil & gas and aerospace, which are expected to contract heavily as a result of the current global economic situation,” he added.
A series of measures have been implemented worldwide to stop the spread of the virus including shutting down businesses, imposing travel restrictions and urging people to stay indoors. These measures have started affecting numerous industries across the globe including petrochemical producers.
The world economy is facing severe economic damage from the coronavirus pandemic that could be even more costly than in 2009, IMF chief Kristalina Georgieva had warned.
“The impact the virus has had on global travel restrictions, reductions of flights, closures in the automotive industry and reduction in light vehicle production forecasts have already affected demand for tires (rubber) and other products associated with packaging and inflight services,” The Arab Petroleum Investments Corporation (APICORP) told Zawya.
The number of infections worldwide continues to rise unabated, climbing to more than 1.3 million as of Tuesday.
“In fact, the impact is only expected to increase across the board until COVID-19 is contained globally given the global nature and deep integration of supply chains. The large build-up in inventories will weigh on the market for several months,” APICORP said.
The OPEC will convene a virtual meeting on Thursday with other oil-producing nations including Russia, to negotiate a truce in a Saudi-Russia fight for market share that has plunged oil prices over the past month. Oil prices have been trading this week near the $33 per barrel level.
In the short term, APICORP believes that the oil price collapse will have two main consequences on the petrochemical sector.
“First, it is accentuating the pre-COVID-19 decline in petrochemicals prices because of the sudden drop in demand,” APICORP said.
Global petrochemical prices fell sharply in 2019. The ICIS Petrochemical Index (IPEX), which is based on contract and monthly average spot prices in a basket of 12 commodities across three major producing and consuming regions, fell by 17 percent in 2019, a report by the Independent Commodity Intelligence Service showed.
“The second consequence predicted is delays in investments in the petrochemicals and chemicals sectors. Furthermore, national and private players have already started cutting capital expenditures, further complicating the existing uncertainties over demand,” APICORP said.
In early March, European oil majors Shell and Total announced their plans to cut capital expenditure. Saudi Aramco said it will cut capital spending in the wake of the coronavirus outbreak.
Investment bank EFG Hermes said that the short-term outlook for the Saudi petrochemicals sector is very challenging due to the current oil price correction, very weak macroeconomics and global uncertainties.
“Short-term volatility is likely to continue, as the market tries to price in both the bad news (coronavirus cases still increasing, KSA/Russia ramping up production), and the good news (stimulus announcements from various governments, a new OPEC+ agreement etc),” Yousef Husseini, Head of Chemicals Research at EFG Hermes told Zawya.
A raft of economic stimulus packages, amounting to billions of dollars, have been unveiled recently by GCC governments to fight the spread of the coronavirus. In March, Saudi Arabia announced a 120-billion riyal ($32 billion) economic package to support the economy.
“We remain concerned that oil prices could still have more downside in the short term as both KSA and Russia may add close to 3 million barrels to the market between them if they don’t reach an agreement soon, and coronavirus is devastating demand,” Husseini said, noting that this would lead to further downside to the current chemical prices.
Prices of petrochemicals are set to decline within a range of 15-20 percent in 2020 and no material recovery is expected to be seen until 2022, Al Rajhi Capital said in a note on the sector.
(Reporting by Gerard Aoun, editing by Seban Scaria)
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