MOSCOW (MRC) -- Backwardation in the forward price curves of natural gas liquid (NGL) feedstocks and carries in the price curves of olefin products may signal an inflection point for the US Gulf Coast (USGC) market, OPIS data show, said Chemweek.
The front month–next month spread for ethylene has been in contango for much of May, while the same spread for feedstock ethane has consistently been backwardated. Further out, ethane's shape is largely flat, with backwardation resurfacing in early 2021. Ethylene, however, shows a relatively pronounced contango shape.
However, ethane's backwardation might be more the result of a contraction in current supply—driven by field shut-ins—than of any prospective increase in feedstock demand. Gulf Coast steam cracker operating rates are struggling at 80–85%, versus peak levels of 90–95%, and this is estimated to have crimped demand for ethane feedstock by around 300,000 barrels per day (b/d).
Therefore, ethylene's ability to capitalize on ethane's backwardation might ultimately come down to how fast world economies recover and/or cracker utilization improves, and competition from other feedstocks.
This implies that indicative early 2021 margins for ethylene improved even further toward the end of May compared with what forward curves suggested earlier in the month. Regardless of the time frame, this also suggests an advantage to petrochemical operators, in the sense that forward prices for the end product appear more favorable than those for the feedstock. However, if cracker rates fail to improve, ethane's backwardation may get more pronounced, but this is unlikely to benefit ethylene producers in the absence of stronger demand.
A similar case can be seen in feedstock propane and product propylene, although the relationship is fundamentally not as tight, propane having many alternative uses and propylene being less dependent on production from propane.
Both propane and propylene's forward curves were in full contango throughout the 2020 market during the first half of May, but the trends diverged, propane flattening with pockets of backwardation while propylene’s contango grew steeper.
Ethylene and propylene are feedstocks for producing PE and PP.
According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 383,760 tonnes in the first two month of 2020, up by 14% year on year. High density polyethylene (HDPE) and linear low density polyethylene (LLDPE) shipments increased due to the increased capacity utilisation at ZapSibNeftekhim. At the same time, PP shipments to the Russian market were 192,760 tonnes in January-February 2020, down by 6% year on year. Homopolymer PP accounted for the main decrease in imports.