Free Fall of Linear Alpha Olefin Prices May End Soon as Crude Oil Costs Surge

OPEC+ announced in the first week of July that there is going to be an extension in the production cut of crude oil. The oil markets subsequently were in a bullish tone such that WTI crude rose by 16 percent in the month of July. As crude oil surged towards the mark of 80, Linear Alpha Olefins (LAO), a class of chemicals that has been facing a free fall since March, is now looking optimistic. LAO are hydrocarbons derived from ethylene, which is price sensitive to crude and Natural Gas, that are intermediaries in the production of plasticizers and packaging materials. The end-use industries for LAO include automotive, Industrial, and consumer products. The major producers of LAO are located in Europe, North America, Asia Pacific, and the Middle East.

The war between Russia and Ukraine, followed by a volley of NATO sanctions, has led to inflationary and recessionary pressure across the globe. The energy prices in Europe continue to remain higher than pre-conflict levels. The supply chains are now being reoriented, and a 'decoupling' is seen in Europe from Russia. This process has led to plummeting of the petrochemicals division since April 2022. LAO is a set of such petrochemicals that have been under free fall since March 2023 as Europe hit a recession and the United States started monetary tightening to control inflation. The demand dropped significantly from American and European markets, constituting LAO's major downstream market.

Another factor many economists consider is the US Inflation Reduction Act 2022 application, which has led to the redundancy of Chinese exports in the US market as the fresh trade war began. The overproduction of LAOs has further led to a decline in the prices of LAO and its upstream and downstream derivatives. World Bank has forecasted global growth of 2.1 %, a full drop of 1% from FY 2022. Along with these forecasts, the global producers of LAO, like DOW, Shell, and Chevron, in their Q2 reports, have affirmed a weak recovery in the petrochemicals division. Against this backdrop, the OPEC+ cuts bring a little solace to the manufacturers.

The positive cost push due to rising crude prices has led to a slower decline of feedstock and LAO prices in the Asian market, as the Asian markets are the largest crude and Natural Gas importers. Economists suggest that the Asian market will begin the bullish trend in the Q3 of FY 2023 due to elevated crude prices. Investors also comment that the monetary tightening in the US, which resulted in the plummeting, will now be gradually reversed as inflation drops below 3 percent. The manufacturing activity in the US seems to pick up as PMI improved in the month of July, and consumer spending is on the rise. All these factors suggest that the gradual improvement in demand for LAO from European and American markets is on the cards in the next half and FY 2024, while from the supply side, the positive cost push may be ushered due to OPEC+ to stop the demise of the petrochemical divisions across the globe.