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Will global feedstock prices soften
 

Since the beginning of 2004, prices of oil and its derivatives have been spiking upwards. Oil prices have been hovering around 13 year highs causing a cascading effect on prices of polymer feedstocks. We keep getting the queries from our readers whether the prices of polymers would ever go down in 2004 - Not likely seems to be our first reaction.

The global economy is turning around and is expected to show a robust growth of 3.5%-4%. In fact, since the last two quarters of 2003, major world economies; USA and Japan have turned positive, Europe seems to be flatter. Asia as expected is leading the growth. It is not surprising that 2/3rd of the growth for 2004 would be derived from the Asian region. The two major drivers for the Asian region; China and India are expected to continue the growth in 2004 at approximately the same levels as 2003.

Further non-willingness of OPEC to increase crude oil production would add fuel to the fire. The OPEC region is not expected to generate more oil because it is more expensive to dig out more oil. The price of oil that had crossed US$37/barrel is not likely to show softening below US$30/barrel. The other non-OPEC oil producing countries may not be able to generate significantly higher levels of oil. Most of the pundits believe that oil price may not remain at US$35-37 level but may not go down below US$32 and probably touch a nadir of US$30/barrel. The chart below clearly illustrates that OPEC region cannot produce more than 7-8% of the 28 million bpdarrels /day.

OPEC PRODUCTION AND QUOTA --------- All figures are in millions of barrels per day
Country March 2004 Quota February 2004 Production Production vs. Quota Output Capacity Potential Additions
Saudi Arabia 7.963 8.45 106.1% 10.2 1.75
Iran 3.597 3.95 109.8% 4.05 0.1
UAE 2.138 2.29 107.1% 2.35 0.06
Kuwait 1.966 2.25 114.4% 2.31 0.06
Qatar 0.635 0.76 119.7% 0.76 0
Nigeria 2.018 2.33 115.5% 2.35 0.02
Libya 1.312 1.48 112.8% 1.48 0
Algeria 0.782 1.15 147.1% 1.15 0
Venezuela 2.819 2.558 90.7% 2.65 0.092
Indonesia 1.27 0.97 76.4% 1.05 0.08
Total 24.5 26.188 106.9% 28.35 2.162

(Source: International Energy Agency, OPEC, Merrill Lynch )

There is a possibility that Iraq could add some sizable generating capacity. Some respite could also come from non- OPEC countries like Russia, Norway, etc. but that may not be adequate.

Will the price go still higher? Most likely not. The experts believe that US$37-38 would be the highest price unless some unforeseen circumstances like a large-scale war.Assuming the price range of oil remains between US$30-37, the derivatives prices that essentially influence the prices of polymers would remain higher and in the same range that we have witnessed in 2003-2004 so far.

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