Friday, January 1, 2010

Chemical Romance

There was a great article in the Wall Street Journal last week on the relationship between the U.S. chemical industry and natural gas.  Seventy percent of U.S. production capacity for ethylene, a vital feedstock in chemical manufacturing, employs natural gas in its production. With price increases in natural gas over the past five years, the domestic chemical industry became less competitive internationally. 

Outside the U.S., especially in Europe and Asia, oil-derived feedstock is more common.  Over the past year as gas prices dipped and oil prices held steady, the traditional price relationship between oil and gas diverged significantly.  As a result, chemicals from oil feedstocks became less competitive, returning the advantage to U.S. chemical producers.  As the article notes, if natural gas prices finds a home between $6 and $7/MMBtu, oil would have to be $40/barrel for U.S. chemical producers to lose their newfound edge. 

The bottom line is that the increase in U.S. supply from shale gas has created an environment (good supply, stable pricing - at least low pricing) that favors the domestic chemical industry.

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