Middle East Tensions Set to Advantage American Chemical Producers

Major Disruptions Hit Global Energy Markets

According to Bloomberg News, Iraq has started to curtail production at Rumaila, the world's largest "supergiant" oil field. Meanwhile, several Gulf nations have halted operations at some of their largest refineries and key energy centers in response to recent Iranian drone attacks. These developments point to a looming, significant disturbance in worldwide energy supplies, especially as the Strait of Hormuz remains blocked.

Impact on U.S. Chemical Producers

Goldman Sachs analysts, led by Duffy Fischer, have evaluated the potential effects of Middle Eastern energy turmoil on American chemical companies. Their findings suggest that U.S. firms are poised to benefit overall from the current instability in the region.

Fischer notes that rising oil prices put pressure on naphtha-based chemical producers in Europe and Asia. In contrast, U.S. manufacturers, who primarily use domestically sourced natural gas, are less affected. This dynamic further strengthens the competitive edge of American chemical companies.

Key Raw Materials and Products

U.S. chemical manufacturers utilize resources such as natural gas, crude oil derivatives, salt, sulfur, and various minerals to create a wide range of products, including:

• Basic chemicals: ethylene, propylene, methanol, chlorine, ammonia
• Plastics and resins: polyethylene, PVC, polyurethane precursors
• Fertilizers: nitrogen-based and phosphate products
• Industrial chemicals: solvents, coatings, acids, adhesives
• Specialty chemicals: components for electronics, automotive, construction, packaging, and consumer goods

The profitability of U.S. chemical production is heavily influenced by the oil-to-gas price ratio. As oil prices climb, naphtha becomes more expensive, raising costs for European and Asian producers. Many of these facilities are already operating near break-even, so further increases could force them to hike prices. This scenario would likely boost spot and export prices for U.S. products, as American producers' natural gas feedstocks remain largely unaffected. The recent events could also enable U.S. producers to secure higher prices for polyethylene contracts in March.

Assessing U.S. Exposure to Middle East Risks

The analysts further examine whether American chemical companies have direct exposure to the Middle East. They conclude that disruptions in the region generally favor U.S. producers.

Why U.S. Companies Stand to Gain:

• Many competing chemical products are manufactured in the Middle East. If these facilities go offline or face shipping constraints, global supply tightens, creating new opportunities for U.S. producers.
• Production in Iran, the UAE, Kuwait, Qatar, and eastern Saudi Arabia is particularly vulnerable, especially with shipping through the Strait of Hormuz disrupted.
• The chemicals most affected include nitrogen, sulfur, methanol, MTBE, phosphate, polyethylene, MDI, titanium dioxide, and chlorovinyls.
• While most U.S. companies are likely to benefit, those with assets in the Middle East could face some negative consequences. However, unless American assets are directly impacted, the overall effect should be positive for the sector.

Exposure and Export Data

Regional Exports by Chemical Chain as a Percentage of Global Exports

Company Asset Exposure to the Middle East

Source: Zerohedge

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