The recent resurgence of geopolitical tensions in the Middle East is raising questions about its impact on the energy and chemical sector.
The primary transmission channels are twofold: firstly, through the cost side, particularly crude oil, and secondly, through the supply side, affecting logistics and raw materials.
Fuel Oil
The Singapore low-sulfur fuel oil market structure continues to strengthen, while the high-sulfur fuel oil market has also found short-term support. For low-sulfur fuel oil, arbitrage economics between East and West are generally unfavorable, leading to an expected further tightening of West-to-Singapore arbitrage volumes to 600,000-800,000 tonnes in June. However, in a market with severe spot premiums, marine fuel suppliers in Singapore are offering competitive prices to prevent inventory build-up. For high-sulfur fuel oil, supply disruptions from the Persian Gulf persist, and with the US-Iran conflict entering its third month, supply constraints have worsened. Concurrently, peak summer power generation demand is likely to further strengthen fundamentals in the coming weeks, providing short-term support for the Asian high-sulfur fuel oil market.
Asphalt
Fluctuating expectations regarding US-Iran negotiations and the reopening of the Strait of Hormuz, coupled with significant oil price volatility, directly impact asphalt production costs. Tight supply of Iranian crude is affecting domestic refineries reliant on Iranian heavy oil. Additionally, with Venezuelan resources no longer flowing to China, asphalt production has declined. Refinery planned production for June is expected to drop by over 53% year-on-year. However, high asphalt prices are delaying demand, with recent demand contracting by more than 40% year-on-year. If conflicts persist, asphalt could face significant shortages during the peak season. Monitoring the subsequent development of the situation is advised.
Polyester
The impact on the polyester chain remains two-pronged: rising costs due to higher crude oil prices, and constrained supply as the ongoing blockade of the Strait hampers the operational ramp-up of refineries, particularly in Asia, affecting the normal supply of chemicals and aromatics. This is especially critical given the continuous decline in inventories of upstream polyester products. If the Strait issue escalates further, maintenance shutdowns in the upstream polyester segment will likely continue. Although downstream end-users are resisting high prices and curbing demand through production cuts, their raw material and finished goods inventories are also at low levels. While speculative demand is absent, rigid demand persists. Overall, the supply shortage appears more pronounced on the upstream side. For ethylene glycol, the impact is primarily on imports. Domestic production, supported by coal chemical processes with good profitability, has been operating at high rates. If imports remain persistently low, destocking will continue. The key variable lies in the import side, necessitating close attention to geopolitical developments. In summary, if geopolitical issues persist, a cautiously bullish stance on polyester chain products may be warranted.
Methanol
Recent military friction between the US/Israel and Iran, coupled with missile launches from Yemen's Houthis, has heightened tensions in the Middle East, significantly increasing the geopolitical premium for methanol. Currently, methanol imports into China remain low. Although Iranian methanol plants are gradually restarting, conflicts in the Middle East introduce uncertainty into regional methanol production and logistics, making it difficult to increase imports into China. Multiple coastal olefin plants are idled. However, high prices in Southeast Asia are supporting increased methanol exports. Coastal methanol inventories are low and continue to decline. If olefin plants like Ningbo Fude restart later, remaining inventories could be further drawn down. Overall, methanol is in a state of weak supply and demand, with prices expected to be volatile but firm in the short term. Close monitoring of Middle East geopolitics and domestic supply-demand dynamics is required going forward.
Plastics (LLDPE)
Fundamentally, demand is currently in a seasonal lull. The primary reasons for previous inventory drawdowns were temporary domestic supply reductions and exports. As supply began to increase in May, the sustainability and intensity of exports are likely to weaken. Without the support of continuous destocking, most chemical products tend to weaken. However, geopolitical tensions remain a variable, potentially leading to another rebound led by crude oil. Continued attention to macro changes is necessary.
Polypropylene (PP)
Fundamentally, several marginal changes have emerged recently: first, signs of improvement in domestic demand indicators, though not strong enough, warrant monitoring to see if this year will see a "busy off-season"; second, the export window has closed; third, supply has increased as expected, with a 13% month-on-month rise in May. From an inventory perspective, PP faces less pressure than plastics. Annual apparent demand is likely to show negative growth this year. Prices are consolidating at high levels in the short term, with geopolitical tensions contributing to renewed strength in chemicals, making short-term trading difficult.
Propylene
Domestic supply has increased month-on-month, with PDH operating rates rising to over 62%. The import window has recently opened. On the demand side, it is at a low point but showing slight month-on-month improvement, leading to destocking at propylene plants. The renewed geopolitical tensions have lifted costs, making the marginal bullish factors more pronounced. Attention should be paid to resistance at previous highs and subsequent changes in import volumes.
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