Middle East War Disrupts Global Oil and China's Chemical Supply

The ongoing U.S.-Iran conflict has escalated tensions across the Middle East, triggering a near blockade of the Strait of Hormuz and significantly reducing regional refining capacity. As a result, global oil and gas supplies are sharply constrained. With the global chemical industry still heavily reliant on petroleum-based feedstocks, a prolonged conflict could severely disrupt chemical production worldwide, including China's chemical sector, potentially causing structural impacts.

According to international data, the Strait of Hormuz normally handles 14–19 million barrels per day, representing 25–30% of global seaborne crude oil trade. Iran's typical exports range from 1.6–2.0 million barrels per day. The war has effectively halted Iranian exports, while countries such as Iraq have cut production by over 50%. Analysts estimate that in the short term, the conflict may reduce global crude oil supply by 10–15%, driving oil prices sharply higher.

Reports suggest that China may have requested its 'Big Three' oil companies to temporarily shift production from chemicals to refined fuels, a strategy sometimes referred to as 'reducing chemicals to increase fuels'. If accurate, the rationale could include:

1. Ensuring stable fuel supplies amid global crude shortages caused by the U.S.-Iran conflict, mitigating import instability.

2. Temporarily increasing domestic production of gasoline, diesel, and jet fuel while reducing exports, to prevent localized fuel shortages.

3. Cutting production of chemicals such as paraxylene (PX) and other petrochemicals, reallocating feedstock to essential fuel production.

Analysts note that such short-term adjustments do not change overall processing capacity but rather restructure output. In China, the Big Three currently achieve an average refined fuel yield of 55–56% and chemical product yield of 24–26%, processing less than 700 million tons annually. If chemical output is cut by a maximum of 10 percentage points, production could drop by around 180,000 tons per day, primarily affecting ethylene, PX, and aromatics. Downstream products such as polyethylene, polypropylene, and styrene would also face reduced supply.

Conversely, increasing fuel output by 10 percentage points could raise daily fuel production by approximately 180,000 tons, dominated by gasoline and diesel, followed by kerosene and other products. In practice, adjustments are likely gradual, typically in 3%, 5%, or 8% increments rather than the full 10-point shift.

• Impact on China's Chemical Industry

1. Tighter raw material supply and price pressure: Reduced availability of key chemical feedstocks like ethylene and PX is likely to drive prices upward.

2. Downstream industry differentiation: Bulk chemical sectors — plastics, synthetic fibers, resins — are highly sensitive to feedstock price fluctuations, which could quickly transmit to production costs and market behavior. Specialty chemicals and new materials, with stronger pricing power, may experience less immediate cost impact, though prolonged increases could trigger price adjustments and structural shifts. Coal-based and light hydrocarbon chemicals may benefit from this temporary realignment.

3. Long-term industry restructuring: While Iran currently faces limitations in maintaining a full blockade of the Strait of Hormuz, any protracted conflict could keep crude oil prices elevated for an extended period. This scenario would encourage Chinese chemical companies to diversify feedstocks, including biomass and light hydrocarbons, accelerating structural transformation in production methods, supply chains, and market positioning.

Analysts argue that industries reliant on imports will be forced to reduce dependence on single-source Middle Eastern oil, shifting toward diversified and regionalized supply channels. For integrated refining and chemical enterprises in China, rising oil and gas costs place pressure on petroleum-based chemicals, highlight the advantages of coal-based chemicals, and concentrate upstream profits, while short-term strategies prioritize fuel over chemical output.