International benchmark Brent crude plunged 31% yesterday, reaching 33 dollars. However, previous fluctuations didn’t have an impact on fashion, despite it’s a sector dependent on oil throughout all its value chain.
Oil plummets and threatens fashion. Yesterday, international benchmark Brent crude plunged 31% yesterday, reaching 33 dollars, the deepest fall in the last 29 years. At the moment, the price is 50% below its levels in January. The oil affects several links of the value chain: fibres, transportation and consumption.
If the oil price war continues, one of the direct repercussions will be on the price of textile fibers derived from it, such as polyester, one of the most used fashion raw materials, or nylon, also derived from black gold.
Polyester production has been increasing in recent years. Its production tripled between 2000 and 2017, according to Statista data. By 2020, global polyester production is estimated to reach 18.1 million tons. Nylon production, meanwhile, increased from 2.4 million tons in 1975 to 5.7 million tons in 2017, although its use in fashion is more residual.
However, although it is derived from petroleum, polyester is also made with other chemical components, and previous fluctuations have not had a significant impact on production or prices of this raw material, since it depends more on the rest of raw materials, like cotton. In 2011, for example, the demand for polyester in the textile industry skyrocketed in 2011 following the escalation of cotton prices.
The price of polyester varies more depending on other raw materials such as cotton
Logistics is other of the links of fashion’s value chain that’s dependent on oil. Fashion globalization, both in its sourcing and its distribution, forces the sector to build a transportation network by land, sea and air. In fact, most of the global fashion exports move by boat, where petrol is the main fuel.
Finally, price war in the oil market will also have a potential impact in the consumer’s spending power. Although the impact will not be immediate, part of the budget of consumers will be free for other expenses
The OPEC vs Russia
The collapse of petrol is the result of the decision of Saudi Arabia, the greatest producer of crude oil in the world, to offer its oil at massive discounts after the failure last Friday of the agreement between the Organization of the Petroleum Exporting Countries (Opep) and Russia to cut the production. The country aspired to an agreement that would shield oil prices from the fall in demand associated with the coronavirus.
On Saturday, Saudi Arabia began to apply strong discount on sales in international markets in order to attract major buyers and decided to increase its production if 9.7 million barrels to eleven million.
Last Saturday, Saudi Arabia started to apply strong discounts to the prices of barrels
Analysts explain that the sinking of oil adds more instability at a time when markets are considering a global recession due to the coronavirus crisis. In fact, yesterday, Wall Street stopped the price during fifteen minutes over the 7% fall of Dow Joes and S&P 500 dragged by the oil and coronavirus calamity.
Meanwhile, Goldman Sachs, has warned that the oil price war between Opep and Russia could drag until Brent’s barrel reaches twenty dollars. The entity has cut its forecasts for the second and third quarter’ of 2019, placing the price of crude at thirty euros.
“The forecast for the oil market is even more pessimistic than in November 2014, when a similar price war began, as it adds to the significant collapse of oil demand due to the coronavirus,” the bank said in a statement.