Oil prices spiked five per cent to more than US$70bbl following the US attack and Iran’s response, before dropping back slightly. They remain well above levels prior to the incident.

 

Wider impacts

 

Higher oil prices act as a brake on consumer spending, so any sustained hike is likely to hurt global economic growth. The manufacturing economy is already fragile, with purchasing managers indices in negative territory for the US and Europe.

 

Business and consumer sentiment soured during 2019 as the US-China trade war deepened and growth slowed in major economies. This is likely to be hurt further by any Middle East conflict.

 

For Rhian O’Connor, lead analyst within Market Demand Analytics at ICIS, the main impact on petrochemicals is sentiment. “The demand side remains very weak for manufactured goods, with pessimism high and investment low. The potential for conflict will further dampen global producers desire to invest. Higher raw material prices will thin margins as producers struggle to pass this through the chain. Any consumer price increases could soften end market demand, at a fragile time.”

 

Margins under threat

 

According to Richardson, ethylene and PE variable cost margins for naphtha-based crackers in northeast Asia fell throughout 2019, and in December hit minus US$90/tonne – the lowest since ICIS records began in 2000. Higher oil prices would squeeze these further whilst demand is suffering because of increased US supply to the region.

 

Unusually, benzene spreads were also below US$100/tonne for six months in 2019.

 

“Higher oil prices will act as a tax on the economy, reduce economic growth and make life worse for petrochemical producers. I think that is probably the bigger story than any interruption to supply,” he added.

 

International eChem chairman, Paul Hodges, is concerned about the additional uncertainty that this development will create for the chemical industry. “Companies are already worried about the downturn in margins caused by the slowdown in the global economy, the rise of protectionism and the relatively high cost of oil," he said. The risk now is that worries over availability lead to a period of higher prices caused by panic buying, and that these can’t then be passed through to end-users due to softening demand.”

 

Contingency planning

 

Hodges believes that any threat to the Strait of Hormuz would almost certainly plunge the global economy into outright recession, given the likely impact on oil market supply and prices.

 

With the conflict unlikely to be resolved quickly, Hodges urges chief executives to focus on contingency planning rather than just assuming they can rely on ‘business as usual’, particularly with the International Monetary Fund already warning that the global economy is in a “precarious” position.