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Post-hurricane oil and gas outlook

October 5, 2005

3 Min Read
Post-hurricane oil and gas outlook

In the wake of twin hurricanes battering upwards of 25% of the nation''s refining and petrochemical industry, industry analysts envision price spikes over the winter months and macro-level issues that could affect plastics production and consumption in the U.S. over the long term.

Howard Rappaport, global practice leader for thermoplastics at industry consultant Chemical Market Associates Inc. (CMAI; Houston), says the hurricanes may have passed, with Rita not reaching the catastrophic strength some feared, but as winter comes, an already tight market could squeeze further, especially for natural gas. As it does, that feedstock and energy source for processors is likely to move past a one-to-one trading relationship on a BTU basis with crude oil.

"We may see a temporary situation develop this winter in the U.S. where natural gas values actually drive higher then crude oil values," Rappaport says. "This may keep prices higher in our domestic market compared to Asia and Europe."

Even prior to the hurricane, prices for natural gas and crude, as well as their downstream by-products, were high by historic standards, with much of the increase attributable to growing global demand. Rappaport believes tight supplies will remain a reality going forward, at least in the short term.

"Demand has increased and will continue to grow in the developing economies of China, India, and Eastern Europe," Rappaport says. "However, supply should have a chance to catch up over the next few years as the overall economy begins to slow and oil-producing countries maximize production."

From his vantage point, Rappaport actually feels that the demand in the marketplace, and subsequently higher prices, are driven by refined products and gasoline, not crude or natural gas, pointing out the need to add refining capacity downstream in key markets.

As prices for oil and gas increase, and conservationists raise alarms around their finite reserves, plastics and anything else remotely related to hydrocarbons is likely to be affixed with a target. For his part, Rappaport says some perspective is necessary.

As it stands, the petrochemical and plastics industries currently use less then 5% of all crude oil for their production, or in the U.S., approximately 20 million barrels/day. That sliver is split further into monomers and derivatives like naphtha, ethylene, and polyethylene, making any calls to reduce the use of resin somewhat misplaced.

"We as consumers can conserve a great deal more crude oil by taking the bus or carpooling than cutting down on plastics use," Rappaport says. "The chemical industry is a relatively small component of overall crude-oil demand."

The recently passed U.S. energy bill directed some attention toward more development of the U.S.''s untapped natural gas reserves. Going forward, Rappaport feels this will be important, especially since the U.S. depends on natural gas to refine ethylene. Active trading of gas on the New York Mercantile Exchange has exacerbated the problem in some cases, and the refining capacity shortage has been further hindered by stricter environmental regulation of the industry. In the face of such regulation, oil companies have stuck to de-bottlenecking existing refineries without building a new one in the U.S. for 30 years.

Still, at least in the near term, the situation is not as dire as some would say.

"In terms of fundamental supply/demand," Rappaport says, "these base hydrocarbons are not necessarily in short supply, but there have been a series of global and regional events that have created some tight spots and high prices."-Tony Deligio; [email protected]

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