OREANDA-NEWS. US ethylene production will continue to outpace demand through 2016 leading to ongoing low prices.

After a brief rebound in prices during the first half of 2016 as producers buy material ahead of turnarounds, new capacity expansions will lead to persistently weak pricing throughout much of the rest of the year.

The beginning of December saw US spot ethylene sink to its lowest level in nearly seven years as a result of booming output from steam crackers that outpaced downstream demand. In 2015, spot ethylene prices declined 59pc from 43?/lb to 17.75?/lb by mid-December, the lowest levels seen since December 2008.

The price decline comes as strong production has added to an already well-supplied market. US ethylene crackers produced 14.9bn lbs of ethylene in the third quarter, up from 14.4bn lbs in the second quarter of 2015 and 13.8bn lbs in the third quarter of 2014, according to the American Fuel & Petrochemical Manufacturers (AFPM). The third quarter ended with 1.2bn lbs of ethylene in storage, up from 971mn lbs at the end of the second quarter, and the highest level since the end of the second quarter of 2014.

Weakness in the front month pushed ethylene's forward curve into a relatively steep contango. The December/January contango widened to 2?/lb amid the depressed front-month prices and expectations that several scheduled turnarounds in the first half of 2016 could tighten the ethylene market. Spreads between December and the second quarter priced the second quarter at a 4-4.5?/lb premium in mid-December.

US ethylene capacity is set to increase following the 2016 turnarounds, which has dampened the enthusiasm of traders hoping to capitalize on spreads in the forward curve, and also points to the possibility that spot ethylene will see further weakness next year.

Expanded polyethylene production from Braskem in LaPorte, Texas, in the first half of 2016 will help take some of the slack out of the market, but the next scheduled derivative expansion isn't until the fourth quarter of the year.

With only one ethylene export facility on the US Gulf coast that loads at a relatively slow rate, international buyers can only take a certain amount of US capacity. Industry observers note that it takes approximately 12 days to fully load an ethylene vessel at the Houston Ship Channel facility.