Global Developments Cloud Chemical Outlook

Jan. 8, 2020
Global chemical outlook is in flux amid US-Iran conflict, US-China trade and weak manufacturing.

Swirling global developments are clouding the outlook for chemicals, from the US-Iran tensions and impact on crude oil to an imminent phase 1 US-China trade deal and weaker manufacturing data across the board for the U.S., Europe and China, according to Independent Commodity Intelligence Services (ICIS). Top of mind is the escalation of conflict after the U.S. targeted killing of Iran’s top general Qasem Soleimani on January 3. Since then, Brent crude oil prices are reportedly up by about 3% to around $68/bbl as of January 6 on concerns on disruptions from Iranian retaliation, after being up by over 5% higher earlier in the day.

Global crude oil dynamics have clearly changed with the surge in U.S. shale oil and gas production. A decade ago, a potential conflict between the U.S. and Iran would have seen at least a double-digit percentage spike in oil prices.

“The increase has been well within normal ranges so far. After the drone attack on the Saudis, and oil prices jumping $8/bbl for a short time before returning to normal, investors may be more cautious [on betting on a sustained rally],” says James Ray, vice president of consulting - Americas for ICIS. “Considering the continued stock build of liquid fuels, and that the drivers of oil prices have shifted to more of a marginal producer mechanism, prices are likely to be more stable and less subject to sentiment driven spikes.”

Yet global crude oil markets could see major supply disruption in an escalating conflict, particularly if Iran targets oil infrastructure and logistics.

“Oil markets will continue to feel the impact of the attack for the short and medium term, as Iran will likely seek to take retaliatory action. The primary concern is over oil supply from the region - Iran has previously threatened to cut off access to the Strait of Hormuz, where over 20% of global petroleum liquids pass through,” says ICIS Senior Analyst Ajay Parmar. “Reduced access to the Strait will remove significant quantities of crude oil from world markets. The response from Iran will likely bring further instability to the Middle East. If conflict spreads to neighboring countries (such as Iraq which produces around 4.7m bbl/day of crude oil), the potential threat to oil supply is even greater.”

Downstream from oil, Iran cutting off the Strait of Hormuz would also directly hit exports of chemicals and polymers from the Middle East. Around 4.7m tons of linear low density polyethylene (LLDPE) are projected to be exported through the strait in 2020 - representing 51% of global net exports from net exporting countries, pointed out ICIS Senior Asia Consultant John Richardson on the ICIS Asian Chemical Connections Blog, using statistics from the ICIS Supply and Demand Database.

For high density PE (HDPE), 4.1m tons of projected exports through the strait (38% of global exports) would be at risk along with 3.1m tons (68%) of low density PE (LDPE). Ethylene glycol and methanol exports would also be heavily impacted.

“But the much more important longer-term issue will be the impact on demand if a negotiated settlement [between the US and Iran] cannot be reached. And even if a settlement is reached, 2020 is still going to be a more challenging year as China’s economy continues to decelerate,” says Richardson.

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