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ANALYSIS: Spot ethylene spikes and slides in a surprisingly volatile week
HOUSTON, March 28, 2016 (PCW) -- Spot ethylene typically moves in small increments and a multi-cent change in a single day is notable. When prompt-month ethylene jumped up 1.5 cpp in a single day on Tuesday Mar 22, some market-watchers wondered when or if a price correction was coming. The subsequent two-day drop of 7.5 cpp was an event that grabbed the attention of the entire supply chain.
Some posited that the volatility was attributed to news that changed perceptions of short-term supply availability. Several notices of ethylene plants flaring created speculation early in the week that the second half of March could see some unexpected supply interruption, which corresponded to higher trades on Monday and Tuesday from 30.75 cpp to 32.25 cpp.
Prices leveled out Wednesday morning with the realization that the flarings were not symptoms of plant shutdowns. By the afternoon, questions began circulating about the likelihood of certain planned turnarounds occurring as expected and Mar ethylene traded from 31 cpp down to 29 cpp in a single afternoon. The successively lower offers didn't stop there, however as aggressive selling pushed Mar down to 24.75 cpp by the end of the day.
The speed of the falling offers was unusual but the overall return to the mid-20s cpp level was less surprising. Spot ethylene started the month at 23.5 cpp and was continuing its steady climb back from a near-historic low price of 15.5 cpp in mid-January. Spot prices in 2015 averaged 29.874 cpp and generally fell from 43 cpp in January of that year down to 18 cpp by December, and the declines continued into 2016.
So far in 2016, prices have averaged 21.485 cpp. Both 2015 and 2016 average prices are a long way from the 2014 average price of 57.275 cpp, a year that saw ethylene plunge from 76 cpp in September to 42 cpp by December, while crude dropped from well over $100/bbl to $54/bbl.
The severe volatility seen in 2014 has given way to a far more stable market, just as the unforgettable freefall in the final months of 2008 melted into a largely range-bound year of 2009.
Of note in recent ethylene market moves is the patterns of forward curve and spread trends. As evidence of ethylene general weakness in the prompt months ethylene has been in contango in the front part of its forward curve for several months. News-driven movements have not lifted the front months into a stronger, backward shape, giving the current month the highest value.
Instead, the longer-term perception of gradually added capacity expansions and the start of new plants coming online over the next 24 months have kept forward prices fairly close to current-month prices. When Jan ethylene was trading at 16 cpp, the contango was 2 cpp at its widest, with 4Q 2016 prices at 18 cpp. During March, the contango shape has ended as early as June and the trend has turned to a backward shape through the end of 2016. So when March was trading at 27 cpp, 4Q was 25 cpp. The flip in shape is indicative that value declines as 2017 approaches, but it's not a steep drop.
As the ethylene market seeks its comfort zone, it may see more hasty moves. Overbought and oversold markets may correct themselves more quickly than in past years, but the general behavior indicates that stability is more powerful driver than short-term speculation. At the same time, ethylene's ascent has brought it closer in price to polymer-grade propylene prices than it's been in years -- that analysis is coming next week. Watch this space! -- Kathy Hall