Crude oil price swings in recent months, combined with a devalued euro, have created a volatile but profitable marketplace for European petrochemical producers, according to analysis from IHS.

The plumpjack that is used for extracting oil. Source: WikipediaThe plumpjack that is used for extracting oil. Source: WikipediaPetrochemical markets are heavily impacted by changes in the crude oil price, since crude oil, and in particular, its derivative naphtha, is an essential steam-cracker feedstock for the production of gasoline and numerous chemicals. Changes in crude oil prices influence not only the overall price level for petrochemicals like olefins and aromatics, but are also a primary driver behind changes in the supply and demand picture.

“After crude oil prices started dropping in the summer of 2014, buyers began postponing their buying decisions for as long as possible, waiting for prices to bottom out," says Michael Smith, vice president of European chemicals, at IHS Chemical. “Now buyers are focused on restocking their inventories in a tight market." He says the challenge for buyers is simply sourcing material, not negotiating on price and this is a "welcomed advantage" for European petrochemical producers.

Polymer and other petrochemical buyers are currently facing a "once-in-a-generation supply squeeze," says Matthew Thoelke, director of olefins at IHS Chemical. He lists four main factors contributing to this situation: buyers have an incentive to restock, European consumption is improving, imports are at reduced levels thanks to a devalued euro and, as a result of these factors, buyers of polymers face a "virtual supply nightmare."

“The weakened euro has certainly been contributing to the Eurozone's recent improved performance along with very low oil prices and stimulus from the European Central Bank, which is benefiting industries such as petrochemicals," says Howard Archer, Ph.D., chief European and UK economist, IHS Economics and Country Risk. “In particular, the weakened euro has provided a significant boost to the competitiveness of Eurozone manufacturers, particularly in export markets." With the euro climbing off its mid-March lows and Eurozone growth expected to continue to firm, IHS thinks it is "unlikely" that the euro will dip below parity against the dollar. "The advantage here for European producers, in terms of the euro disparity, is likely to erode." he says. However, the euros' performance could be impacted by whether or not Greece stays in the Eurozone.

“How long this tight supply of petrochemical market will last in Europe depends on what happens with oil prices," Thoelke says. "Fundamentals still point to an oversupplied oil market, and IHS Energy expects the Brent price to fall back to $50 per barrel in the coming months, when close to 2 million barrels per day of crude oil will be heading into storage. If this happens, demand is likely to ease."

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