Cost pressures or cyclical tailwinds: How does oil's breakthrough above $90 per barrel impact allocation value for the petrochemical industry?

Since 2026, global geopolitical risks have surged, and the resulting fluctuations in international crude oil prices have attracted significant attention from global capital markets. In the first week of March 2026, as conflicts in the Middle East continued to escalate and the Strait of Hormuz shipping lane was obstructed, international oil prices soared for consecutive days, with Brent crude futures breaking through $90 per barrel on March 6. For the petrochemical industry, is this oil price level a cost pressure or a boost to prosperity?

Figure: Geopolitical events drive Brent crude futures prices to rise sharply, breaking the $90 per barrel threshold

Data source: Wind, as of March 6, 2026

1. Overall Correlation: Oil prices have a long-term positive correlation with petrochemical industry prosperity, but high oil prices can hinder further increases

In the long term, crude oil, as the primary raw material in the petrochemical supply chain, exhibits a clear positive relationship between price fluctuations and industry prosperity. Historical data shows a high correlation between chemical product prices and oil prices. During upward cycles, the elasticity of petrochemical product prices is released, industry profits increase, and overall revenue and profit margins improve. Rising oil prices, driven by supply and demand improvements, often translate into higher ROE for petrochemical companies. Based on this pattern, the CSI Petrochemical Industry Index, which includes the “Three Barrel Oil” companies and leading refining and chemical firms, along with the chemical industry ETF E Fund (516570) linked to this index, offers significant allocation value and is worth attention.

Figure: Oil prices are highly correlated with petrochemical industry ROE, showing a long-term co-movement

Data source: Wind, ROE as of September 2025, prices as of March 6, 2026

However, this positive effect is not linear. Industry experience indicates that when oil prices are between $80 and $100 per barrel, the profitability of the petrochemical industry tends to be within a comfortable “prosperity window.” In this range, upstream extraction profits are substantial, and midstream refining can pass on cost pressures relatively smoothly downstream while earning inventory gains. When oil prices exceed $100, the marginal benefit to profits gradually diminishes. On one hand, governments may impose higher “super profits taxes” (such as the “Oil Special Revenue Levy”) on upstream oil and gas extraction, reducing the profits of companies involved in exploration. On the other hand, if energy prices surpass $100, downstream price acceptance may face bottlenecks, hindering cost transmission, narrowing profit margins, and potentially suppressing long-term terminal demand. Currently, oil prices have broken through the $90 mark, placing the industry in this sensitive zone, which means overall benefits are accompanied by significant structural differentiation within the industry.

Figure: The ROE of the petrochemical industry index generally correlates positively with oil prices, but the effect is nonlinear

Data source: Wind, as of September 2025

Figure: The net profit attributable to parent of the petrochemical industry index generally correlates positively with oil prices, but the effect is nonlinear

Data source: Wind, as of September 2025

2. Short-term Structural Differentiation: Upstream and substitution routes benefit, terminal segments may face pressure

The rapid rise in oil prices often causes differentiated impacts across various petrochemical segments, with companies experiencing very different circumstances.

Upstream exploration companies are the most direct beneficiaries of rising oil prices. They will see profits increase directly from higher product prices. Additionally, high oil prices will encourage global oil and gas companies to increase capital expenditures, potentially leading to a dual benefit of increased orders and improved industry sentiment in the oilfield services sector.

Substitution processes also benefit significantly. When costs of oil-based chemical products surge, alternative routes such as coal chemical industry—using coal as raw material to produce fuels, urea, chlor-alkali, olefins, aromatics, etc.—tend to have relatively stable costs. Their product prices tend to rise in tandem with oil prices, significantly expanding profit margins. The CSI Petrochemical Industry Index includes leading Chinese coal chemical companies like Huayu Hengsheng, Baofeng Energy, and Luxi Chemical, which are poised to benefit from coal chemical substitution opportunities. The ETF E Fund (516570), which is linked to this index, is the largest product in this category.

Table: Rapid growth of coal chemical capacity in China

Data source: China Coal Industry Association, Guosen Securities

Furthermore, some globally concentrated chemical products experience supply constraints due to geopolitical conflicts, leading to price increases. For example, sulfur, a byproduct of oil and gas processing, has inelastic supply. Under tight supply and peak downstream demand, related product prices are likely to remain strong, offering larger profit margins for domestic producers and traders holding inventories.

However, the other side of the coin is that terminal products such as plastics, tires, and coatings face significant cost pressures. These industries are close to end consumers, with fierce market competition and limited ability to pass on costs. Rapid increases in upstream raw material prices, if not quickly passed through, will directly squeeze profit margins.

3. Long-term Pattern Evolution: Rising costs in Europe reinforce the “East rises, West declines” logic in refining

Beyond short-term price fluctuations, the current geopolitical conflicts are catalyzing a deeper industry trend—rebalancing the global chemical industry landscape.

The conflict has not only driven up oil prices but also triggered a surge in European natural gas prices. Natural gas is a key energy source and raw material for European chemical companies. The sharp increase in costs is a heavy blow to Europe’s already high energy-cost industrial sector. Especially in high-energy-consuming, high-value-added sectors like vitamins, methionine, and polyurethanes, Europe’s share of global capacity is significant. Under cost pressures, capacity exit is accelerating.

For China’s chemical industry, this presents a rare “structural share expansion” opportunity. China boasts the most complete chemical industry chain globally, relatively stable energy costs, and a large domestic market. As European competitors shrink due to cost disadvantages, domestic leading companies can leverage scale and cost advantages to absorb global inflation, accelerate profit recovery, and further expand their global market share.

Figure: Europe’s chemical industry constrained by high natural gas costs

Data source: Wind, as of December 2025

Table: Overview of European chemical capacity shutdowns

Data source: CEFIC, Wind, Guotou Securities, Shenwan Hongyuan Securities

Not only are international oil prices high, but the petrochemical industry is also entering a phase of fundamental recovery: (1) long-term fixed asset investments turning negative, with capacity cycles peaking and profit margins potentially expanding; (2) under the “14th Five-Year Plan” and the implementation of dual carbon policies, high-energy-consuming enterprises face capacity ceilings, benefiting the supply side; (3) policies to “control incremental growth, reduce existing capacity, and regulate processes” are making the petrochemical industry’s “anti-involution” and “steady growth” measures more comprehensive, increasing the industry’s recovery slope; (4) rising overseas demand coupled with capacity exits may shift exports from volume-based to value- and price-driven growth, leading to valuation reshaping for China’s industrial sector; (5) demand benefits from new and old kinetic energy conversion, with new chemical materials expected to inject resilience into industry demand.

Chemical Industry ETF E Fund (516570, connecting funds: 020104/020105) packages leading petrochemical, basic chemical, and coal chemical companies, directly benefiting from dual carbon policies and chemical product price increases. Additionally, the ETF is the largest in scale among those linked to the same index, with low management and custody fees totaling only 0.20% per year—much lower than similar products—making it an effective low-cost tool for positioning in the industry’s supply-demand dynamics and recovery opportunities.