Price Wise: Higher resin prices here we come

As exhaustive evidence shows, crude oil prices drive resins prices. U.S. plastics processors have been lucky in the last year or so that WTI crude oil prices have been suppressed by a supply glut at Cushing, OK. But the party's over -

Oil Pipeline Reversal Pushes Up Prices

Wall St. Journal, 17 Nov 2011

The sale of an oil pipeline running from Oklahoma to Texas upended U.S. energy markets, sending the price of crude surging above $100 a barrel. Enbridge Inc.-which bought a 50% stake in the Seaway Pipeline-announced it would reverse the direction of the flow, allowing more crude to move south from oil storage in Cushing, Okla., into the world's largest refinery complex along the Gulf Coast.

Over the past two years, the U.S. has started producing so much oil that existing pipelines have been unable to move it to refineries. That has led to a glut of oil in the center of the country, keeping the price of American crude far below that of petroleum traded overseas.

That will change once the pipeline is reversed, a process expected early next year ...

The U.S. requires companies hold a special permit to export oil from the Gulf Coast, but the restriction doesn't apply to gasoline. With a new supply of oil headed to Gulf Coast refineries, exports of gasoline are expected to rise.

"It's hard to overestimate the significance" of reversing the pipeline, said a lead industry economist at the EIA. He said it was the start of a process to reconfigure the U.S. pipeline system to carry increased domestic oil production to the Gulf Coast.

For decades, oil has been imported from overseas to the Gulf Coast, then either refined there or moved elsewhere in the U.S. for processing. The pipeline system was set up to move crude from south to north. But booming U.S. oil production and declining imports mean oil now needs to move from north to south ...

Industry analysts don't expect rising U.S. crude-oil production to translate into lower gasoline or diesel prices anytime soon. So much gasoline and diesel is exported from the Gulf Coast that U.S. customers compete with customers in Mexico and the rest of Latin America-and have to pay as much as these foreign users. The result is that all this new U.S. oil won't significantly lower prices at American gas stations, unless global gasoline prices drop ...

U.S. oil prices jumped 3.2% to close above $100 per barrel for the first time since June, settling at $102.59 per barrel. Prices are based on oil stored in Cushing. Traders confronted the prospect that crude oil flowing into that storage hub would soon find a new route to refineries on the U.S. Gulf Coast-and from there to buyers of petroleum products around the world.

Because of the glut in Cushing, the price paid for crude in the Midwest U.S. has been substantially less than European benchmark prices, such as Brent crude. This is expected to largely disappear by the middle of next year, as the Seaway pipeline change gets underway.

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For processors without a risk management program in place, either your margins or your customers are going to suffer under higher resins prices. For processors without their heads in the sand, now you will have an even easier time of beating your competition. Congratulations to the latter!

About the author: Tom Langan of WTL Trading is a risk management consultant helping processors and suppliers control raw materials costs, increase revenues, and secure and improve profit margins