The recent rise in oil prices is welcome news for petrochemical producers in the Gulf, which are likely to benefit from improved margins arising from higher revenue and fixed feedstock costs.
The petrochemical industry in the GCC relies on ethane gas, which it receives at a heavy discount to international market prices. In Saudi Arabia, gas allocations are priced at only 75 US cents per 1 million British thermal units. This cost advantage has enabled the Gulf to establish itself as a major supplier of petrochemicals to the world market.
Higher oil prices will boost Gulf producers' margins as their Asian counterparts, which base their production on crude-based naphtha, are forced to raise prices. This enables Gulf players also to sell their products at higher prices, so boosting their margins.
"If [Asian producer's] costs go up, their prices should go up, and if you're in the Middle East you should benefit from that," said John Tottie, an energy analyst at HSBC.
Mr Tottie cautions that widening margins could be offset by a slump in sales.
A growing shortage of natural gas in the region prevents future projects from profiting from this dynamic, as they will increasingly be fed by naphtha. Governments are already more reluctant to grant gas allocations to petrochemical producers, forcing new ventures to adopt liquid feedstocks.
The adoption of naphtha as a feedstock also undermines the competitiveness of Middle Eastern producers.
"At a time when petrochemicals production cost in the Middle East could rise due to the move to liquid feedstocks, the cost and margin advantages that Middle East petrochemical companies have enjoyed during the past few decades will likely decline marginally," said Asheesh Sastry, a principal with the global management consultancy Booz & Company.
Upcoming projects, such as an expansion of the Saudi Aramco-Sumitomo joint venture Petro Rabigh, have already been planned as naphtha-based producers, said Mr Tottie.
A joint venture involving Saudi Basic Industries Corporation, ExxonMobil and Satorp, a joint venture between Saudi Aramco and France's Total, will also rely on crude for its feedstock.
