International oil prices plummet sharply; the petrochemical industry faces a severe situation

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Although *** called on the Federal Reserve to halt interest rate hikes and U.S. stock markets stopped falling and began to recover, the oil market did not gain any confidence as a result. On the contrary, the oil market fell into panic once again. International oil prices suffered a sharp drop on Tuesday; by the close on December 18, WTI fell by 3.64 points to 46.24, hitting a new low for the session since August 2017 and recording the largest single-day decline in over three years ； Brent fell 3.35 to 56.26. The main SC 1903 contract dropped by 6.7 to 422.2 yuan per barrel, while the after-hours trading saw a decline of 16.1, ending at 406.1 yuan per barrel. Before October this year, international oil prices saw months of continuous increases, followed by a sharp drop from those high levels. There are essentially two reasons for this: an oversupply of crude oil and high global inventory levels. The monthly \"Drilling Productivity Report\" released by the U.S. Energy Information Administration predicts that shale oil production in the seven key regions of the United States will increase for the 24th consecutive month in January 2019, continuing to reach new record levels ； Data shows that the number of oil wells drilled but not yet completed in shale oil production areas continues to rise. Reuters reported that BP’s largest oil field has been reactivated, increasing supply levels. At the same time, Russia’s daily crude oil production has reached a record high, with daily output in December set to reach 11.42 million barrels. Data released by the American Petroleum Institute show that as of the week ending December 14, U.S. crude oil inventories stood at 441.3 million barrels, up by 3.5 million barrels from the previous week; among these, inventories of crude oil in the Cushing region, which is of significant interest to the market, increased by 1.1 million barrels. During the same period, U.S. gasoline inventories increased by 1.8 million barrels, while distillate inventories decreased by 3.4 million barrels. Inventory data has heightened concerns about an increase in crude oil supply. The global economy is slowing down, with weak demand at the downstream end. Investors are concerned about the prospects for global economic growth, as it is the pace of economic growth that will determine the increase in oil demand. Market participants are still awaiting the Federal Reserve’s monetary policy decision; there is a general expectation of a 25-basis-point interest rate hike, although U.S. President *** tweeted again on Tuesday morning to reiterate his opposition to such a hike. Bank of America Merrill Lynch’s survey of investors for the next 12 months shows that investor confidence is declining, with an increasing number of fund managers expecting global economic growth to slow down over the coming year – the worst economic outlook in 10 years. Furthermore, selling in the stock market has also heightened concerns over a slowdown in global economic growth and weak demand for crude oil. The sharp drop in international oil prices has triggered waves of disruption in the petrochemical industry. Due to the limited domestic crude oil resources in China, refineries rely on imports from abroad for most of their crude oil needs. According to Zhuochuang Data, from January to November 2018, China’s crude oil production was 172.748 million tons, imports were 418.111 million tons, and apparent consumption was 588.258 million tons; thus, the import dependence ratio was 70.63%. The procurement cycle for this portion of crude oil sourced from external suppliers is usually 2–3 months; during this time, the cost of purchasing the crude oil is fixed, whereas the prices of the petrochemical products derived from it change in line with fluctuations in international oil prices later on. As is well known, the products of the petrochemical industry are highly correlated with international oil prices. As international oil prices continue to fall, the prices of products in the domestic petrochemical industry also drop. In such a situation, driving more often results in greater losses; the more one drives, the more money is lost. Therefore, when international oil prices drop sharply, local refineries usually choose to reduce their production or shut down for maintenance, while state-owned enterprises have no choice but to endure the situation. In addition to the loss in product prices, the depreciation of the price of crude oil in inventory also puts pressure on businesses. Assuming a refinery with a capacity of tens of millions of tons and inventory capacity in the millions of tons, the financial losses resulting from a drop in international crude oil prices cannot be underestimated. Since the beginning of this year, the international economic landscape has been highly volatile, with international oil prices following an “M”-shaped trend. As early as June, domestic refineries began to face significant pressure, and the profits of the refining industry continued to decline; a large proportion of these companies’ profits came from products derived from the chemical industry. Starting in October, international oil prices saw successive sharp drops, which led to a decline in the prices of chemical products as well. Profits in the chemical industry continued to shrink, leaving less profit available for support; as a result, petrochemical companies found themselves in an even more difficult situation. Based on the comparison chart of price trends in the crude oil and petrochemical industries, oil prices show a strong correlation with those of organic chemicals, plastics, and petroleum, while there is a significant difference in their trend compared to rubber prices. Furthermore, since oil prices serve as a barometer for the petrochemical industry, when there is a clear trend in oil prices, some products that are not related to oil also suffer significant impacts. Although methanol is derived from coal and natural gas, calculations based on data models show that its correlation with international oil prices is 0.74. As can be seen from the comparison chart of oil prices and methanol market trends, especially after October 2018, international oil prices dropped sharply, and the methanol market followed a trajectory very similar to that of crude oil. However, the decline in international oil prices is a double-edged sword: while it hurts the petrochemical industry, low oil prices will benefit sectors such as aviation, logistics, and downstream petrochemical processing. Aviation fuel accounts for about 40% of the costs in the civil aviation industry; therefore, a significant drop in international oil prices will lead to a noticeable reduction in costs for the aviation and shipping sectors, providing companies with more opportunities for development. Additionally, the road logistics industry can also benefit from the drop in fuel prices.