Its good news for Oil Companies when oil prices start to rise, but Exxon Mobil Corp (NYSE:XOM) has even more reason to smile because of its chemical business.
Exxon to benefit more from the chemical business despite rising oil crude prices
Petrochemical producers such as Exxon, who are weighed heavily to the Middle East and North America, benefit significantly from high crude oil prices. This is because that makes their natural-gas liquids-based products more competitive. The US and Middle East-based petrochemical plants used natural-gas liquids, unlike the Asian and European based facilities that use naphtha-based feedstock or oil. As of 2019, over 60% of Exxon Mobil’s chemical production was located in Saudi Arabia and North America.
According to Morgan Stanley, the dynamics have been favorable this year, and the sustained low oil prices have resulted in the competitiveness of oil producers in Europe and Asia. Also, analysts have predicted that natural gas prices will keep rallying and thus chi away from the petrochemical producer’s advantage. Interestingly global demand for chemicals has remained steady despite the stagnation of economic activity. This has softened the impact felt by petrochemical producers.
Demand for petrochemical boosting fortunes for Exxon
Although the pandemic might have cramped traveling, it has nevertheless not affected demand for plastic packaging. As a result, polyethylene, one of Exxon’s main chemical products, has been on demand. Citigroup indicates that it remained resilient throughout the pandemic even though it is related to overall GDP. When it released its Q2 results, the company mentioned that despite posting a loss, its chemical business was cushioned by string demand in hygiene and packaging segments.
Most importantly, the demand for petrochemicals tends to grow quickly compared to GDP, while refined products and oil grow slower. According to Devin McDermott, the North American oil and natural gas research head at Morgan Stanley, the growth rate for oil is around half the GDP’s growth rates historically. Interestingly profit margins could recover mainly due to the slowing of new supply additions.