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Oil surges past RMB900 as broken logistics chains trigger a major cost shift

September 14 brought an unusually sharp one-way rally to the mainland futures market. The most actively traded Shanghai crude oil futures contract, 2610, briefly touched RMB910 (about HK$992) a barrel before closing at RMB904.7 (about HK$986), up more than 11% on the day. It was the first time mainland crude futures had closed above the RMB900 mark since their listing.

This is not a normal commodity-cycle fluctuation. International crude prices also surged on September 14, with WTI futures breaking above US$100 a barrel to US$102.49. Brent futures stood at US$107.26 after touching US$108.65 intraday, their highest level in four months. Based on the year-to-date average, Brent was at US$87.55 a barrel as of September 10, 28.4% above last year’s full-year average. In other words, the September rally has added another sharp leg higher to an already elevated base.

Markets have traditionally attributed high oil prices to active production cuts by oil-producing countries. This time, however, the main driver is not an internal OPEC battle over output reductions, but an actual physical rupture in the supply chain: the conflict in the Middle East is simultaneously affecting two critical chokepoints for global oil transport.

It is not just one waterway under pressure

The Strait of Hormuz handles the transit of about one-third of the world’s seaborne oil trade. As the US-Iran conflict continues to escalate, shipping efficiency through the strait has deteriorated markedly, forcing major oil producers including Saudi Arabia, Kuwait and the United Arab Emirates to cut exports. One further point, not mentioned in the original account but crucial to understanding the scale of the disruption, is that the Bab el-Mandeb, which links the Red Sea with routes to the Suez Canal, is also under pressure. Yemen’s Houthi movement has announced that it controls Perim Island in the Bab el-Mandeb, while Saudi Arabia’s East-West Pipeline was temporarily closed after an attack. The pipeline had served as an alternative route for Saudi Arabia to transport crude to Yanbu on the Red Sea if passage through Hormuz was blocked. Middle East energy exports are therefore facing simultaneous disruption at two major straits, rather than a problem involving just one waterway. China International Capital Corporation estimated initially that the reduction in Middle East oil exports since September had widened to more than 10 million barrels a day compared with pre-conflict levels, a further deterioration from earlier forecasts. It also raised its estimate of Brent’s supply-driven floor for the year to US$80 a barrel.

Wu Yan, an analyst at Longzhong Information, said that with no sign of an easing in regional tensions, the market was continuing to price in a higher risk of disruption to Middle East supplies, driving international oil prices higher for a consecutive run of sessions. Macro estimates by Zhuochuang Information put actual global crude supply at about 98.5 million barrels a day, against demand of 104.6 million barrels. The difference represents the daily supply shortfall of 6.1 million barrels cited by the market, pointing to exceptionally tight conditions.

Zhu Guangming, a senior analyst at Zhuochuang Information, said output had fallen significantly in several OPEC countries. Saudi Arabia, Kuwait and the UAE had been forced to cut oilfield production because of transport disruption, while additional output from non-OPEC producers such as the United States and Canada remained limited and could not fill the gap in the short term. This externally driven “involuntary production cut” is fundamentally different from traditional output adjustments: the former lacks transparency and has no predictable recovery timetable, while the latter operates with clear targets and a negotiation mechanism.

The US Energy Information Administration also reported that US crude inventories, including the strategic reserve, fell by more than 7 million barrels last week. This suggests that the strategic buffer originally intended to smooth price volatility is being drawn down more rapidly, further weakening expectations of a near-term retreat in prices.

The chemical chain’s “survival line”

Every move in crude prices is transmitted down the industrial chain, eventually reaching everyday consumer goods. Mainland chemical markets are now undergoing a major reassessment of costs.

Methanol prices have been the first to break historical highs. As of September 11, the average spot price in Taicang, eastern China, was RMB3,489 a tonne, up 26.28% month on month and 54.38% year on year. Spot quotations in Guangdong in southern China had also exceeded RMB4,000 a tonne, their highest level since 2016. Fan Jing, an analyst at Longzhong Information, said that although crude prices did not determine methanol pricing, they had significantly amplified the market’s response by raising the landed cost of imported methanol and adding a geopolitical risk premium to shipping through the straits. It is worth noting that as costs for the oil-to-olefins route have risen sharply, companies producing methanol from coal and coke-oven gas have seen their profitability recover to some extent, creating a degree of self-balancing on the mainland supply side.

By contrast, the PTA (purified terephthalic acid) chain is facing even more severe cost pressure. As of September 14, the benchmark PTA futures price was hovering at around RMB6,900 a tonne, just RMB139 below its four-year high. An Guang, a PTA researcher at Zhuochuang Information, said calculations based on that week’s PX and PTA spot transactions indicated that the average spot processing fee for September had been squeezed to RMB413 a tonne. That was only just enough to cover the theoretical break-even level for a new generation of smart production facilities, while many older production lines were effectively facing the dilemma of “making a loss by producing”. Cash flows at small and medium-sized chemical-fibre companies are under severe strain. (Editor’s note: The precise PTA figures above could not be independently verified through public sources against the same original source. They are, however, consistent with the broader trend of processing fees remaining under pressure in recent months as crude and PX costs have risen. Downstream editors are advised to check the original reports from Longzhong or Zhuochuang.)

Where the wealth is really moving

High oil prices have produced a clear map of diverging fortunes in the capital markets.

The most direct beneficiaries are distributors at the end of the industrial chain. Heshun Petroleum (603353.SH), a mainland-listed company, reported attributable net profit of RMB81.5503 million (about HK$88.94 million) for the first half of the year, an annual increase of 480.48%. The company had already flagged the rise in a profit-alert announcement in mid-July, saying it was mainly driven by the rise in international crude prices and a simultaneous increase in mainland retail price caps for refined oil products. Wholesale prices from refining companies, however, often lag behind government-guided retail prices. The resulting wider gap between wholesale and retail prices allowed distributors with stable petrol-station networks to capture excess profits.

At the manufacturing end, the picture is entirely different. Guochuang High-tech (002377.SZ), another mainland-listed company, said in a September 10 announcement on unusual share-price movements that its procurement cost for petroleum asphalt, a key raw material, was rising in line with international oil prices and directly eroding project profits. Its asphalt business had a gross margin of just 4.54% last year. If its pricing mechanism cannot keep pace with raw-material costs, operating risks will increase further. One additional point not covered in the original account is that Guochuang High-tech’s attributable net profit actually rose 92.82% year on year to about RMB18.99 million in the first half of this year. The improvement mainly reflected the disposal of its property brokerage business, a change in control and the acquisition of Ningbo Guopei, which improved its earnings structure, rather than any benefit from higher oil prices. In other words, the company’s warning was a forward-looking assessment that further oil-price rises would increase future cost pressure; it did not mean the company had already suffered losses in the first half. The two points should not be conflated.

Chemical giant Qixiang Tengda has repeatedly told investors that it is offsetting cost volatility by broadening procurement channels, locking in raw-material prices and optimising production schedules. Even so, it said production costs had risen by “varying degrees”. At the same time, the company said fluctuations in crude prices had pushed up the selling prices of key products including methyl ethyl ketone and maleic anhydride, and that this could represent an earnings turning point amid a new supply-and-demand rebalancing cycle. This shows that Qixiang Tengda is facing pressure from higher raw-material costs while also benefiting in part from higher product prices; it is not simply a victim of the oil-price cycle. The original account devoted relatively little attention to this aspect.

The divergence points to a clear trend: the additional wealth created by higher prices is accumulating with upstream resource producers and downstream retailers, while manufacturing and processing businesses in the middle are being forced to act as a reservoir for absorbing inflationary costs.

Hong Kong investors are also exposed to the trend. The H shares of the three mainland oil majors — PetroChina (0857.HK), Sinopec (0386.HK) and CNOOC (0883.HK) — are all beneficiaries of the latest oil-price rally. Several investment banks have recently raised their target prices. CNOOC’s attributable net profit rose 23.42% year on year in the first half, and several brokerages said it had benefited the most among the three.

Four indicators to watch next

Will the latest crude-oil surge now lose momentum? Developments in four areas will be key signposts for the market’s next move.

First is the security situation in the Strait of Hormuz and the Bab el-Mandeb, the critical variable hanging over the entire oil market. A meeting on shipping security in the Strait of Hormuz between the Gulf Cooperation Council and Iran, originally scheduled to take place in Oman on September 14, has been postponed. US Energy Secretary Chris Wright has also publicly warned the market against assuming that a breakthrough is imminent. Any progress in ceasefire talks or an agreement to escort vessels could trigger a sharp retreat in futures prices; conversely, an escalation in localised clashes would directly push up forward premiums.

Second is the actual contribution from US shale oil. Although governments have called for the release of strategic reserves to bring down oil prices, private shale producers remain disciplined in their investment. New capacity has fallen well short of expectations, making changes in the EIA’s total rig count and drilled-but-uncompleted well figures worth watching.

Third is the speed at which higher chemical prices are passed through to finished goods. Downstream packaging, textile, footwear and clothing companies are still absorbing higher raw-material costs through long-term contracts. Once bulk price increases take effect in business-to-business markets, consumers will feel the real erosion of purchasing power in everyday goods.

Finally, attention should be paid to the turnover pace of refinery and social inventories. Once extreme bullish sentiment fades, midstream traders generally begin actively running down stocks. If inventories at both the wholesale and retail ends fall rapidly at the same time, it will indicate that the window for profiting from the high-price era is narrowing sharply.