PLAIN SIGNAL
This week’s underreported story: second order-effects of the Middle East crisis. Let’s look past the surging oil prices, and see what else is impacted by the Strait of Hormuz.
Beyond the Gas Pump
Every time the Middle East heats up, retail investors do the same thing.
They buy defense stocks. They buy oil majors. They buy anything connected to the price of gas at the pump.
It's the wrong move.
Crude is the obvious play, but smart money digs deeper into the supply chain. The real story of the Strait of Hormuz crisis isn't about crude oil. It's about the global materials market.
This is the story of naphtha arbitrage.
The Strait of Hormuz and the Insurance Blockade
The Strait of Hormuz is suffering from more than just a military blockade. The chokehold is also coming from insurance actuaries.
Drone warfare has made transiting the Gulf incredibly risky. Maritime insurance premiums (the Hull & Machinery kind) have gone from 0.1% to over 10% for a single trip. That means a tanker trying to move goods out of the Persian Gulf could lose its entire profit margin just on the insurance bill.
Heavy crude is getting rerouted through overland pipelines to the Red Sea. That's the workaround. But other critical resources are stuck. And the biggest one nobody is talking about is naphtha: the primary feedstock for global chemical manufacturing. About 20% of the world's petrochemical supply is stranded behind this actuarial wall.
Why Naphtha Matters
Naphtha is everywhere. It gets cracked in giant industrial plants to make the resins and plastics in your food packaging, your car parts, basically everything.
Here's where it gets interesting. Asian and European chemical companies need Middle Eastern naphtha to run their plants. With naphtha trapped in the Gulf, prices are surging. Foreign plants are shutting down or running at reduced capacity. They can't get the raw material.
But U.S. chemical companies don't use naphtha. They use ethane. It's a natural gas liquid that’s cheap and abundant for domestic companies.
While global costs are skyrocketing, U.S. input costs haven't moved. That gap is pure margin. And executives aren't being shy about it.
In petrochemicals, if you go to Asia and Europe, naphtha is the feedstock. Our big advantage in the Americas, Canada, US, Argentina, for Dow, is light cracking ethane. Globally, we're close to 85 percent light cracking. Ethane fundamentals haven't changed, but oil fundamentals have changed dramatically. That's widened the oil to gas spreads.
There’s huge demand for what US companies can supply to Asian and Middle Eastern companies that are in desperate need of naphtha.
Who to Keep an Eye on
There are three companies that are in prime position to take advantage of the arbitrage play:
Dow Inc. (DOW) is the big one. Massive Gulf Coast footprint. One of the largest chemical manufacturers on the planet. Global buyers are calling to lock down plastics and resins. U.S. crackers are running at over 90% capacity right now.
The price spike that happened in naphtha takes the top 5 to 10 percent of the producers out... The incentive is there for everything else in the fleet to run exceptionally hard, and the volume is there to move.
Targa Resources (TRGP) is the toll collector. If the world can't get naphtha from the Middle East, they're going to import U.S. natural gas liquids instead. Targa is the bridge. They pipe NGLs out of the Permian Basin straight to Gulf Coast export terminals.
Our integrated Mont Belvieu and Galena Park Marine Terminal assets allow us to provide the raw product, fractionation, storage, interconnected terminaling, refrigeration and ship loading capabilities to support exports by third-party customers... We believe that our ability to offer these integrated services provides us with an advantage in competing.
LyondellBasell (LYB) is the quieter play. Same Gulf Coast presence. Same ethane advantage. They benefit from the exact same dynamics as Dow. As global competitors throttle down, LYB picks up the slack.
The Takeaway
Geopolitics don't hit the market evenly. The Strait of Hormuz crisis is crushing European and Asian manufacturers. But for the U.S. Gulf Coast? It's a tailwind.
Naphtha could be a difference maker for a few key domestic chemical companies. Keep an eye on these suppliers moving forward.
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