Saudi Petrochemicals - NCBC

Oil: Correlation & pricingPetrochemicals are dependant on oilCrude oil and natural gas are primary feedstock for hydrocarbons like ethane andpropane, and hence, they have a strong bearing on the prices of petrochemicals.Price hikes in crude oil and natural gas during the last decade resulted in highpetrochemical prices. This in turn boosted the prices of downstream products,including polymers and plastics. The US Henry Hub natural gas prices rose to anaverage of USD6.95/mmbtu in 2007 from USD4.23/mmbtu in 2000 and WTI crudeoil prices jumped to an average of USD72.30/brl from USD30.37/brl over the sameperiod. Consequently, during 2001-2007, ethylene prices increased approximately156% and propylene prices grew by about 176% and boosted prices ofpetrochemical derivatives during 2001-2007, reflecting in the prices of plastics andpolymer.The uptrend in crude oil and natural gas prices was interrupted in 2H08, asconsumption declined amid the global economic crisis. Consequently, petrochemicalprices also dropped as feedstock prices declined. Prices for the key building blocksof petrochemical products – ethylene and propylene – collapsed significantly duringthe same period. Ethylene and propylene prices declined in the range of 65–75%between July 2008 and December 2008. Petrochemical prices have since recovered,attributable to the improving demand scenario but more strongly attributable to theincrease in the price of oil.Exhibit 17: Petrochemicals prices and oil price correlationEthylene (USD/mt) and oil price (USD/barrel)1800Correlation : 0.87160014001200100080060040020000 20 40 60 80 100 120 140 160Source: BloombergCorrelation between oilprices and thepetrochemical sectorranges between 80-90%NCBC oil forecastOil plays a large part in the outlook of both petrochemical prices and petrochemicalstocks. The correlation between oil prices and the Petrochemicals sector has beenvery strong over the past 1.5 years and at times ranging between 80-90%. Oildemand and supply scenarios are the key factor instrumental in shaping oil pricetrends. Unusually cold weather in Western regions supported oil demand in Januaryand in turn the crude oil price touched USD87 per barrel. Though this level shows astrong rebound of 177% from its lows of December 2008, it is around 60% thelevel of its highs of July 2008.27 April 2010 SAUDI PETROCHEMICAL SECTOR17