Mounting Risks of Supply Tightness in the Global Chemical Industry Chain

As of early June, the combined total of U.S. commercial crude inventories and the Strategic Petroleum Reserve (SPR) had dropped to 791 million barrels—the lowest level since February 2024. International energy agencies project that a critical inventory limit could be reached in July or August. At a recent sector conference, Chevron’s CEO noted that market buffers and shock-absorption mechanisms are being steadily depleted, significantly weakening the system's ability to absorb supply-demand imbalances. An unnamed energy executive told the media that crude inventories are already at dangerously low levels and that the grim outlook to the coming weeks has been communicated to the highest levels of government.

The tightness in physical markets stands in stark contrast to the optimism seen in financial markets. Data shows that traders are cutting long positions on Brent crude to an 18-week low while tripling short positions, signaling a market bet that shipping through the Strait of Hormuz will soon return to healthy. However, analysts warn that physical supply constraints will ultimately override any market narratives or sentiment. Once the buffer is exhausted, prices must bear the full burden of market adjustment—resulting in either consumers paying higher fuel costs or the destruction of demand.

In fact, signs of demand destruction have already emerged. Since the initial surge in oil prices caused by disruptions in the Strait of Hormuz, consumption of refined petroleum items has begun to decline in certain regions of the world. Yet, there is a clear limit to this demand suppression. As Goldman Sachs has previously noted, economic activity cannot sustain indefinite demand contraction. If oil supplies remain tight, economic activity will be forced to slow, possibly triggering a broader economic shock. JPMorgan has warned that unless tanker traffic through the Strait of Hormuz returns to healthy by the end of June, oil prices are poised to surge; this would sharply increase the cost of refining feedstocks and severely erode profit margins to downstream companies.

to the energy and chemical industries, the chain interaction triggered by depleted inventories and spiking oil prices is particularly immediate. The sector bearing the brunt of this impact is naphtha, the core feedstock to ethylene crackers. Currently, the landed price of naphtha in Japan has risen by greater than 30% compared to pre-conflict levels. Should crude oil prices climb another 10% to 15% due to supply constraints, naphtha valuations would approach the $1,000-per-tonne mark, pushing Asian crackers that rely on purchased naphtha into negative profit territory. Some cracker operators in South Korea and Japan are already evaluating plans to minimize operating rates to July and August; a general cut of 5% to 10% in operating rates would immediately curtail spot supplies of ethylene, propylene, and downstream items like polyethylene and ethylene glycol, further driving up chemical prices.

Of even greater attention is the possibility that an oil price shock could slow global economic development, causing a simultaneous contraction in end-market demand to chemical items—ranging from packaging materials and automotive parts to construction insulation and textile fibers. This would create a "double squeeze" of cost-push pressures and shrinking demand, compressing the profit margins of refining and chemical companies to their absolute limits.

Analysts indicate that the next four to six weeks represent a critical window to observation. If crude oil inventory levels continue to fall at the current pace and geopolitical supply issues remain unresolved, chemical companies should take proactive steps: securing prolonged feedstock contracts, rising inventory reserves, and making flexible arrangements to operating rates in the second half of the year. to facilities reliant on a naphtha-only production route, the current ecological stability once again underscores the strategic value of feedstock diversification and supply chain resilience.