What are petrochemicals?
Petrochemicals – sometimes abbreviated as “petchems” – are a set of chemical compounds that fuel a wide array of products that are integral to modern economies and societies.
A petrochemical, in the strictest sense, refers to a chemical manufactured or derived from crude oil and natural gas, as distinct from fuels.
Petrochemicals, which are made of hydrocarbons that are separated and extracted from crude oil and natural gas, are at the core of multiple industries.
Some examples include:
- Cosmetics
- Electronics
- Packaging
- Textiles
- Toiletries
Common to all the industries on this list – and many others – is that they use a variety of plastics and polymers derived from petrochemicals.
This breadth of practical uses across many industries makes petrochemicals one of the largest drivers of global oil demand.
Despite environmental concerns, particularly over single use plastic wrapping and its disposal, petrochemical demand – led by plastics – continues to grow at a significant rate, particularly in Asia.
With the development of alternative transportation fuels, many oil refining companies now see petrochemicals as their future, rather than gasoline or diesel.
Chemistry of petrochemicals
All petrochemicals are examples of organic compounds, which are chemicals primarily made up of carbon and hydrogen. Originally, organic compounds were thought to come only from living things, but since the 19th century, science has recognized thousands of organic compounds that can be synthesized from manufacturing processes such as oil refining. In fact, of the million or so known compounds (a compound is matter made up of at least two different chemical elements) over 95% of them are organic compounds.
Most organic compounds share the same characteristics:
- They have low melting and boiling points
- They burn
- They decompose or crack at high temperatures
- Most are not very soluble in water
- Some are capable of being converted into very large molecules, such as polyethylene (in a process called polymerization)
Carbon and hydrogen are abundant in the world, and both have the propensity to attach themselves to other atoms.
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How are petrochemicals priced?
Physical petrochemicals are priced by supply companies issuing a monthly price update after negotiation with their clients. Price reporting agencies collate prices for each petrochemical from various suppliers and then publish a number of spot price indices around the world.
Historically, there were a number of price reporting agencies all with their own price collection methodology and reporting structures. In recent times, a lot of consolidation has taken place, leaving two major price reporters – ICIS and IHS Markit – both of which are owned by S&P Global.
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Unlike other commodity groups, most petrochemical groups have yet to evolve any sort of effective published forward curve. While both price reporting agencies issue forecasts on a monthly basis, these are simply forecasts and do not represent a valid forward curve.
There are several commodity banks and traders that offer risk management services to their clients by providing swaps against various petrochemicals, especially those quoted as spot indices by price reporting agencies. As there are no published forward curves, these banks/traders have to become market-makers and build up a price based on a combination of forecasts published by the price reporting agencies, published forward prices of feedstocks (such as naphtha, ethane, propane, and ethylene), and their own market view.
This content is taken directly from the Intuition Know-How course on commodities.
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