After collective blockbuster mid-year reports from chemical companies, the Middle East 'powder keg' has exploded again—this weekend has been anything but calm for the chemical industry.

After collective blockbuster mid-year reports from chemical companies, the Middle East 'powder keg' has exploded again—this weekend has been anything but calm for the chemical industry. This weekend, the chemical industry received two重磅 (high-impact) updates simultaneously: one from the Middle East—traffic through the Strait of Hormuz has dropped to zero, and Brent crude surged nearly 10% in a week to $96.78 per barrel; the other from listed companies’ half-year earnings forecasts—Hengyi Petrochemical’s net profit soared 23-fold, while Dongfang Shenghong’s jumped 12-fold. A geopolitical oil price shock, coupled with explosive corporate earnings growth, has made the chemical sector this summer’s most unmissable battleground. As soon as geopolitics flared up, oil prices went wild first. Brent crude rose 9.85% this week to $96.78/barrel, gaining nearly 29% since July. The Strait of Hormuz has ground to a complete halt, and the Bab el-Mandeb Strait also faces potential blockade threats—roughly one-fifth of global oil supply is now being cut off. ANZ Bank bluntly stated: if supply disruptions worsen, Brent could surge toward $120. Domestically, Shanghai Crude (SC) jumped over 6% on July 24; fuel oil, LPG, and styrene all rallied sharply in tandem. The logic is straightforward: the Middle East is the lifeblood of the chemical industry—if that lifeblood constricts, the entire value chain trembles. Refining & petrochemical enterprises have emerged as the biggest winners in this rally. Hengyi Petrochemical’s net profit is forecast at RMB 5.5–6.0 billion, up over 23-fold year-on-year—the true 'champion of earnings'; Dongfang Shenghong’s is projected at RMB 4.2–5.0 billion, up nearly 12-fold; Rongsheng Petrochemical’s stands at RMB 5.0–5.2 billion, up over 7-fold. Satellite Chemical expects RMB 6.0–7.0 billion, and Hengli Petrochemical RMB 7.2 billion—both exceeding 119% YoY growth. Tongkun Group’s profit surged over 274%. Companies that were mired in refining losses last year have turned around dramatically this year, riding both rising oil prices and demand recovery. The logic? Higher oil prices lift downstream product prices, while leading firms’ inventory costs reflect earlier low-priced crude—this 'scissors gap' translates directly into profit. Fluorochemicals represent another independently strong segment. Tungsten hexafluoride (WF₆) prices surged 230% YoY, with 5N-grade material selling at RMB 1,750–1,840/kg. Refrigerants R32 and R134a remain at elevated levels of RMB 64,000/ton, underpinned by strict production quota systems. The biggest wildcard lies in fluorinated liquids: after 3M’s exit, a multi-thousand-ton supply vacuum opened up—and the data center liquid-cooling market is projected to explode from $4.8 billion in 2025 to $27.1 billion by 2035.

Refining capacity gap...

Market discussion around cracking margins—especially diesel cracking margins—has intensified recently. These margins have held near 97 USD/bbl for several days without any sign of correction. This level is already at a historical extreme; if it breaks higher, broader implications may follow. We’ve previously discussed cracking margins: though tensions persist in both the Middle East and Ukraine-Russia, markets no longer fear crude scarcity. Oil prices fluctuate—but lack a strong directional trend. However, refineries in both regions have suffered clear damage. During the peak of Middle Eastern tensions earlier this year, numerous refineries were forced offline. Moreover, the Strait of Hormuz serves as a critical conduit for refined product shipments. In March, cracking margins briefly spiked near $100/bbl—but later retreated as geopolitical conditions stabilized. In the latest U.S.-Iran flare-up, crude prices rebounded modestly—yet quickly faded, failing to sustain an upward move. Diesel cracking margins, however, neared $100/bbl by late July—outperforming crude significantly. The underlying logic is simple: once refining capacity exits, it’s extremely difficult to restore. Restarting facilities and bringing new units online takes one to two years. In the interim, constrained supply inevitably pushes margins higher. Recently, both oil prices and cracking margins have risen in tandem—not just due to the Middle East, but also escalating pressure from the Russia-Ukraine front. Ukraine’s current strategy involves striking Russian refineries every few weeks; over 80% of Russia’s refining capacity has already been hit. Despite being one of the world’s largest crude producers, Russia has effectively become a net importer of refined products. Russia, in turn, has retaliated: news today confirms Ukrainian refineries have also come under attack. Both sides are now targeting each other’s energy infrastructure—escalating uncertainty dramatically. Overall, tensions remain high across both theaters. Any further supply disruption—even minor—could push diesel cracking margins decisively past the psychologically critical $100/bbl threshold. Historically, breaching such key levels often triggers pronounced market reactions; close monitoring is warranted in the coming period. From a macro perspective, we remain bullish on China’s oil & gas–chemical industrial chain. Relocation of capacity to China is a structural trend. Today, China’s ‘15th Five-Year Plan’ for petroleum & natural gas was officially released—with its refining section explicitly stating: “Maintain moderately surplus refining and petrochemical capacity.” This reflects strategic redundancy for energy security. Structurally, the plan also emphasizes phasing out outdated capacity and concentrating investment toward large-scale, advanced refining complexes—a clear tailwind for industry leaders. Top-tier players along the oil & gas–chemical value chain remain compelling long-term holdings. Separately, upstream resource themes also drew attention this weekend—particularly agriculture. Sentiment remains positive, with fundamentals unchanged: El Niño–driven crop shortfalls continue to dominate. A notable development is Morgan Stanley’s comprehensive scenario analysis, forecasting potentially significant price shocks in the first half of next year. El Niño’s global impact is profound—many have already felt its effects via extreme heat and heavy rainfall—but its agricultural consequences are only beginning to unfold. Markets will progressively focus on these developments, generating event-driven opportunities—patience is advised. Finally, turning back to broader markets: today’s performance was robust overall, with major indices closing solidly higher. Following four days of consolidation, broad-based gains delivered a notably positive sentiment.

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