On May 31, during an online meeting, the Organization of the Petroleum Exporting Countries (OPEC) deliberated on the issue of increasing production in July and reached an agreement on a large – scale production increase plan of 411,000 barrels per day.
Double – Pressure on the Domestic Chemical Industry
Currently, the domestic chemical industry is facing dual pressures from market fluctuations in both the upstream supply and downstream demand. At the upstream supply level, the international oil price has declined by nearly 15% this year. Despite this, OPEC has decided to implement an aggressive production increase plan, which is expected to further intensify oil price fluctuations. On the downstream demand side, influenced by the US tariff policy, market disorder is compounded by weak market expectations, adding numerous uncertainties.
In response to this market situation, many institutions, when interviewed by China Securities Journal, stated that numerous enterprises adopt futures hedging in their operations to mitigate the risks of significant price fluctuations, use basis pricing to optimize procurement costs, and rely on these internal measures’ certainty to resolve external uncertainties.
OPEC’s Continued Production Expansion
After announcing a daily production increase of 411,000 barrels on two previous occasions, at the May 31 OPEC meeting, the topic of July production increase was discussed. It was decided to announce a large – scale daily production increase of 411,000 barrels for the third consecutive month. This move may lead to a further decline in oil prices.
In fact, since last week, there have been continuous reports about the OPEC meeting in the market. Many institutions have predicted that OPEC is likely to continue to accelerate production. Under this market expectation, global hedge funds are betting on a sharp drop in crude oil prices with the most aggressive stance in eight months. As of the week ending May 27, asset management companies increased their net short positions in Brent crude oil by 16,922 contracts to 130,019 contracts, reaching the highest level since last October. Meanwhile, data from the US Commodity Futures Trading Commission (CFTC) shows that the net short position in West Texas Intermediate (WTI) crude oil has also risen to a three – week high.
Since the start of this year, the international crude oil price has been fluctuating, with an overall decline of nearly 15%. Due to the drop in crude oil prices, market concerns about the future performance deterioration of the oil extraction industry have intensified. Statistical data released by the five major oil companies in Europe and the United States show that in the first quarter of 2025, their combined net profit was $20.531 billion, a 29% decrease compared to the same period last year.
While oil prices have been continuously falling, the coal industry is also facing difficulties. Since October 2024, the domestic price of thermal coal has started to decline. According to Wind data, as of May 22, the price of 5500 – kilocalorie thermal coal (CCI5500) has dropped to 618 yuan per ton, a decrease of over 150 yuan per ton compared to the beginning of the year, representing a 19.7% decline and reaching the lowest level in nearly four years.
The latest data from the National Bureau of Statistics shows that from January to April, the profits of the domestic petroleum and natural gas extraction industry decreased by 6.9%, the profits of the coal mining and washing industry dropped by 48.9%, and the losses of the petroleum, coal, and other fuels processing industry increased year – on – year.
Promotion of Basis Pricing in the Chemical Industry Supply Chain
The prices of upstream raw materials such as oil and coal have dropped significantly. At the same time, downstream chemical products are facing the uncertainty risks brought about by the US tariff war, resulting in large – scale price fluctuations and increased volatility.
Take ethylene glycol, an important domestic chemical product, as an example. The price of ethylene glycol futures reached a high of 4,867 yuan per ton at the beginning of this year. It then continued to decline, and after the United States announced the implementation of “reciprocal tariffs”, the decline accelerated. On April 9, it even dropped below the 4,000 yuan per ton mark, with a decline of nearly 18%. However, after the joint statement of the economic and trade talks between China and the United States in Geneva was released, ethylene glycol prices rebounded immediately. By May 14, it had risen to the highest level of 4,557 yuan per ton, rebounding by nearly 15% from the low point on April 9. Subsequently, the market price entered a volatile trading pattern.
Product price fluctuations are not beneficial for enterprises in the industrial chain, and managing price risks is extremely urgent. Qin Youfu, General Manager of the Comprehensive Trading Department of Shanghai Textile Investment Trading Co., Ltd., said that the US tariff policy has both bullish and bearish impacts on the market. On one hand, the tariff dispute will reduce the export of the chemical fiber industry and the demand for ethylene glycol, which is a negative factor for ethylene glycol; on the other hand, the US countermeasures against China in response to the tariff dispute will reduce the import of ethylene glycol from the US and affect the operating rate of domestic ethane – to – ethylene glycol enterprises, reducing the supply, which is a positive factor.
Qin Youfu introduced that the company has always used futures hedging to avoid the risks of significant price fluctuations, and most price risks can be effectively hedged. At the same time, the relationship between the futures and spot markets of ethylene glycol has been continuously strengthening, and the penetration rate of basis pricing has been increasing. The combined futures and spot trading model is now increasingly widely applied in industrial chain trade.
Fe Yang, the polyester manager of Zhejiang Helian Tongyu Industrial Co., Ltd., introduced that the company has established a three – dimensional risk management framework consisting of “spot operation + futures hedging + over – the – counter options“. By monitoring basis fluctuations in real – time, the company executes sell hedging during the period of futures premium and adopts buy hedging during the period of futures discount to optimize procurement costs. In the face of periods with significant absolute price fluctuations, the company uses over – the – counter options to hedge the basis and avoid losses caused by basis fluctuations. In addition, the company relies on the commodity research of the entire polyester chain and combines certain macro – analysis to optimize the basis strategy.
Breaking the “Internal Competition” Model
Although the prices of crude oil and coal have continued to decline, downstream chemical industries such as ethylene glycol still face continuous pressure. In recent years, new production capacity in China’s ethylene glycol industry has been continuously released. According to data, by the end of 2024, the domestic ethylene glycol production capacity was 282.25 million tons, an increase of 165.5% compared to the 106.3 million tons of production capacity in 2019. The domestic ethylene glycol output in 2024 was approximately 19.5 million tons. The excess production of ethylene glycol has led to intensified competition and reduced industry profit margins. Recently, the National Development and Reform Commission issued a document to rectify “internal competition”, and the issue has received widespread attention.
Zeng Yingyue, an energy and chemicals researcher at Zhejiang Commercial Futures, believes that capacity reduction is crucial for the industry as a whole, and for enterprises, strengthening cost control is the key to survival. Managing price risks is also an important part of cost control. Especially in the current situation where the uncertainty of raw material prices due to the tariff dispute has increased, enterprises must enhance their risk management capabilities. For ethylene glycol production enterprises, in addition to formulating sales strategies based on factors such as company inventory and production plans, they should also fully utilize the functions of the futures market, accurately assess market trends, strengthen risk management, and optimize sales channels.
Di Yilin, an energy and chemical analyst at Guangda Futures, pointed out that since the launch of ethylene glycol futures, the industry landscape of ethylene glycol has undergone a dramatic transformation. As the supply and demand situation of the ethylene glycol industry shifted from shortage to abundance, the compression of production profits led more and more enterprises in the industry to choose to use futures tools to hedge operational risks. In terms of pricing methods, basis arbitrage has become the most important pricing model for enterprises, enabling them to flexibly respond to market fluctuations and reduce price risks. In terms of trading models, the ethylene glycol industry has also entered the 3.0 era. Many enterprises have adopted new models such as option trading to meet diverse risk management needs and achieve sales targets at expected prices.
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