Oil prices have retreated from their highs. Petrochemical products that previously gained a premium due to geopolitical conflicts are now undergoing a process of "geopolitical premium squeeze," while coal chemical products and those with independent fundamentals are returning more quickly to pricing based on their own supply and demand dynamics.
Fluctuations in chemical product prices during March and April were primarily influenced by the volatility of the geopolitical situation. Recent signs of easing in US-Iran negotiations have led to a decline in crude oil prices, but uncertainties persist. Our analysis of the trends for various chemical products is as follows.
**Fuel Oil** The market structure for high-sulfur and low-sulfur fuel oil has weakened recently. For low-sulfur fuel oil, rising freight costs have made arbitrage between East and West uneconomical, and disruptions from the Middle East conflict have reduced resource flows from the region. Consequently, arrivals of low-sulfur fuel oil from Western markets are expected to decline. However, weak downstream demand for marine fuel continues to suppress the market. For high-sulfur fuel oil, the East-West spread for 380CST has narrowed from its peak in the initial weeks following the outbreak of the Middle East conflict. Arrivals of high-sulfur fuel oil via arbitrage from the Americas in May are expected to decrease compared to April. Additionally, arrivals from Russia have already diminished due to impacts from Ukrainian attacks.
**Asphalt** Expectations regarding the reopening of the Strait of Hormuz have been volatile, leading to significant swings in oil prices that directly affect asphalt production costs. Tight supply of Iranian crude has impacted domestic refineries reliant on Iranian heavy oil. Coupled with the halt in resource flows from Venezuela, this has resulted in reduced asphalt output. Refinery production plans for May show a year-on-year decrease of over 50%. However, high asphalt prices are causing demand deferrals, with recent demand down more than 30% year-on-year. If conflicts persist, asphalt could face significant shortages during the peak season. It is advisable to monitor subsequent developments in the conflict, as the market has entered a phase of high unpredictability.
**Polyester** Terminal demand in the polyester chain is traditionally weak during May and June. However, post-Lunar New Year geopolitical factors caused a sharp rise in raw material prices, disrupting downstream procurement rhythms. Finished product and raw material inventories at the terminal end have been consistently declining, with replenishment hesitant due to concerns over the instability of high-priced inputs. Realistically, terminal demand is currently quite weak. Nevertheless, if crude oil and polyester raw material prices decline, terminal restocking demand is expected to be released. Currently, against a backdrop of lackluster demand, raw materials like PX, PTA, and MEG appear somewhat overvalued. However, supply disruptions due to the Strait issue are a tangible near-term factor. In a context of weak supply and demand, a crude oil pullback would likely trigger an initial sentiment-driven decline in polyester raw materials. Since crude prices are unlikely to return to pre-conflict levels, the downside for polyester raw materials may be limited. Once oil prices stabilize (for instance, if Brent falls to around $85-90 per barrel), terminal restocking demand could emerge, allowing polyester raw materials to revert to fundamental logic with relatively clear support levels.
**Polyolefins** Recent volatility in chemical products has been mainly driven by geopolitical instability. Although navigation through the Strait of Hormuz has not yet fully resumed, geopolitical tensions are gradually easing. Expectations are that supply of raw materials and chemical products will progressively recover, leading to a downward shift in polyolefin price centers. Fundamentally, the second quarter is a concentrated period for maintenance shutdowns in China, including both planned outages and those caused by raw material shortages. Maintenance-related production losses hit a record high in April, but domestic supply is expected to increase in May. Downstream demand is weak, with low procurement willingness and no significant increase in new orders. Export profits and volumes have reached record highs, particularly for PP, while apparent demand growth for the first four months cumulative was negative. Inventories are being drawn down in the upper and middle streams but remain high year-on-year. Key factors to watch going forward are changes in domestic supply and further geopolitical developments.
**Methanol** The US and Iran are in a negotiation phase, with multiple media reports suggesting a potential agreement is near. However, minor clashes occurred overnight, causing crude oil to halt its decline and rebound, indicating that the geopolitical situation remains fluid. Domestic methanol operating rates have risen, though some units are scheduled for spring maintenance, which may reduce operating rates next week. Overseas operations are stable, with several Iranian units awaiting restart. Olefin operating rates have seen little change, while rates for traditional downstream sectors have mostly declined. Data from Longzhong Information shows inventory builds both in coastal and inland areas this week; the persistence of this inventory accumulation warrants attention. Currently, methanol imports into China are low, downstream profits are poor leading to reduced operating rates, and exports increased in April-May. In the short term, prices have retreated from highs mainly due to a reduction in geopolitical premium rather than a substantive improvement in supply. Close attention should be paid to developments in US-Iran talks, Strait of Hormuz navigation, and domestic supply-demand dynamics.
**PVC** The market has been pricing in expectations of a US-Iran detente. Although these expectations have been volatile, the market generally views an agreement as a matter of time, and the reopening of the Strait of Hormuz is also not expected to be long delayed. In April, PVC destocking fell short of expectations, and prices have retreated to levels seen in early March. However, with upstream operating rates continuously declining and remaining at low levels year-on-year in the short term, the supply side offers some support. Going forward, PVC is likely to trade more on its own fundamentals, involving a contest between low valuations and high inventory, and between marginal improvements in supply-demand and the extent of inventory drawdown. Operating rates for the calcium carbide process remain high, which could incentivize maintenance in low-price regions later, providing strong price floor support. The recovery of operating rates for the ethylene process is slow, with many maintenance plans still pending. Short-term, upstream pre-sales have declined due to the holiday period, presenting a neutral factor. However, upstream inventory builds appear supportive year-on-year, partly reflecting concerns over price volatility amid US-Iran uncertainty. Inventory is forecast to continue drawing down next week. Futures prices have returned to a consolidation range, with the market showing relative strength.
**Caustic Soda** Caustic soda is minimally affected by the US-Iran conflict, with its market reverting to domestic fundamentals. Export volumes have not changed significantly. Although conflict risks remain, the caustic soda market has become increasingly desensitized, and expectations for easing have strengthened. Caustic soda now follows oil-related fluctuations less closely. However, if the Strait of Hormuz reopens, some sentiment-driven decline is still possible, and with the market in contango, this presents bearish factors for the Caustic Soda 2607 contract. Currently, caustic soda supply and demand are weak. Inventory pressure, while somewhat alleviated, remains significant. A substantial further increase in exports is unlikely. The main focus is on the impact of summer maintenance volumes on the supply side. Considering seasonal factors for liquid chlorine and the peak season for caustic soda, after bearish factors are digested, the Caustic Soda 2609 contract may present a favorable long opportunity.
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