The futures market for Monoethylene Glycol (MEG) experienced a sharp rally on July 24, as the main contract EG2609 surged over 3% to briefly touch the 5,000 yuan/ton mark. This price jump is primarily attributed to renewed geopolitical tensions in the Middle East, which have pushed crude oil prices higher and strengthened the cost support for MEG. Improved supply and demand expectations are also contributing to the upward momentum.
According to a report from Xinhua Daily, Yemen's Houthi group issued a statement on July 23, claiming responsibility for attacks on two oil tankers, the "ENCELIA" and the "LAYLA", using ballistic missiles, cruise missiles, and drones. The group stated the vessels were targeted for violating a previously announced Red Sea shipping ban, with the attacks causing fires on both ships. The statement further declared continued maritime military operations against Saudi Arabia and a policy of "blockade in response to blockade." It also threatened larger-scale strikes on targets inside Saudi Arabia if the kingdom launches new military actions in Yemen. Concurrently, the Chinese Embassy in Saudi Arabia has reminded Chinese institutions and citizens to enhance security precautions. Additionally, U.S. President Donald Trump indicated on July 23 that he is seriously considering restarting major military operations in Iran, claiming the scale would surpass previous actions like "Epic Anger."
This escalation in the Middle East has driven a sustained increase in oil prices. Brent crude broke through the $100 per barrel mark, and as of the July 24 close, China's domestic crude oil futures contract SC2609 rose by 4.52% from the previous trading day. This provides a solid cost-side support for MEG.
Key Driver 2: Sustained Expectations for Port Inventory Drawdown Provide Strong Boost
The Houthi blockade in the Red Sea threatens to further disrupt global energy and chemical product supply. Concurrently, the Strait of Hormuz is effectively close to being shut down as the U.S. and Iran resume hostilities. This latest round of Middle East turmoil severely hampers MEG exports from the region, breaking the earlier expectation of a recovery in China's import volumes for August. With the Strait of Hormuz again under blockade, the volume of foreign MEG cargoes arriving at Chinese ports in August is expected to drop to low levels. Given the current situation and the scheduled maintenance of several domestic MEG plants in July and August, port and social inventories of MEG for the near-term delivery months are expected to continue depleting. Considering that port inventories in East China have already fallen to low levels and the difficulty in quickly restoring import volumes in the short term, the expectation of inventory drawdowns from these low levels has significantly boosted MEG prices.
Looking Ahead:
Amid the Middle East conflict, crude oil prices are holding firm and rising, providing strong cost support. Furthermore, a significant number of MEG plants in the Middle East are reducing or halting production. The closure of the Strait of Hormuz directly impacts the transportation of cargo from Iran, Kuwait, and Saudi Arabia's east coast. Consequently, MEG imports in August are projected to fall to around 300,000 tons. If the situation in the strait does not improve, imports could potentially drop back to the low levels seen earlier in the year. Driven by the turmoil in the Middle East, MEG prices are expected to retain upward momentum in the short term, with the price center moving higher. As a strategy, long positions in MEG futures can be maintained. However, given the high price volatility, to hedge against the risk of a sharp pullback, investors could consider purchasing put options. An alternative option strategy is to employ a bull call spread.
Risk Warnings:
A rapid and abrupt de-escalation of the Middle East conflict; lower-than-expected maintenance volume at MEG plants; and a surprise increase in import volumes.