ORLEN ORLEN Group 2017
Integrated Report

Short-term Market Outlook

GRI INDICATORS:
Capitals:

The ORLEN Group operates in a changing macro environment. Trends in the economy and employment, as well as other macro factors significantly influence the consumption of fuels and petrochemical products, ultimately impacting sales volumes and prices. Therefore, the Group monitors key economic and market indicators on an ongoing basis.

Projected demand is among the most vital indicators. Demand for liquid fuels is driven by three main factors: the size of the vehicle fleet in a market, the efficiency of engine combustion process, and average kilometres travelled by a vehicle per annum. While the first two indicators evolve over time, the latter depends on consumers’ disposable incomes. From the perspective of the economy as a whole, a meaningful synthetic measure of income is gross domestic product, with movements in real GDP also reflecting the impact of fuel prices . The infographic below shows movements in GDP and fuel consumption in the ORLEN Group’s core markets to 2017. The economy will likely continue to expand at a healthy rate in 2018, although the figures for Poland will not include the effect of the rapid growth recorded in 2017 that was spurred by regulatory changes which helped to significantly curb the grey market.

Poland 

GDP growth
Year-on-year change (%)

Fuel consumption
million tonnes

 

Germany 

GDP growth
Year-on-year change (%)

Fuel consumption
million tonnes

Czech Republic 

GDP growth
Year-on-year change (%)

Fuel consumption
million tonnes

Lithuania 

GDP growth
Year-on-year change (%)

Fuel consumption
million tonnes

An important indicator is the price of crude oil. In 2018, we expect the price of Brent crude to increase compared to the average for 2017, as a result of the extension by the end of 2018 of OPEC countries' agreement to reduce oil production by 1.8 million bbl / d. However, it should be expected that a stronger increase in the price of oil will result in a simultaneous increase in production in the US and in other regions outside of OPEC, which should lead to limiting price increases. Because in the short-term the key role in shaping oil prices is played by financial transactions on paper markets, reacting immediately to any signals announcing the possibility of changes in demand and supply, one must take into account the relatively high volatility of prices of this raw material.

Through the cost mechanism: in the short-term perspective, they have no substitutes, so they act on the economy like taxes. Lower fuel prices increase disposable income, which is ultimately divided into consumption and savings (domestic), ie the main determinants of GDP growth. As fuel prices rise, the cost mechanism works the other way: the disposable income and, consequently, the GDP decreases.

Forecasts for Brent crude prices by IHS Markit - March 2018

Crude prices have serious implications for refiners’ profitability, which is expressed through downstream margin. The margin is calculated as the difference between revenue from sales of finished products (refinery and petrochemical products) and the cost of feedstock (mainly crude oil). The ORLEN Group’s operating performance strongly depends on the differences between market prices of petroleum products and prices of oil and other necessary feedstocks (called crack spreads). The cost of feedstock and the selling prices of refined products for the ORLEN Group are dictated by many factors outside its control. These include:

  • Movements in the supply of and demand for refined and petrochemical products.
  • Expansion of global production capacities.
  • Changes in operating costs (energy, utilities, maintenance).
  • Changes in environmental and other regulations, generating significant costs for the ORLEN Group.

Model downstream margin [USD/bbl]

 

A moderate reduction of the margin is expected in 2018 relative to the 2017 average, as margins on refined and petrochemical products decline on the back of rising oil prices. The fall of downstream margin may decelerate on the expected real increase in consumption of fuel and petrochemical products driven by further growth of the global economy.



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