'Higher for longer' oil to insulate upstream chemicals - Jefferies

Methanex

31/05/2022 11:34

** Jefferies expects chemicals to outperform basic materials
over the next few months on a combination of less conviction on
demand trends and an upward bias in oil prices
    ** "So long as oil "higher for longer" persists, upstream
chemicals (are) insulated," it says, pointing to the five phases
oil prices have been in over the past 35 years
    ** The brokerage flags that consensus could shift from a
"spike & then collapse" scenario to a new phase if the current
oil rally extends for another three to five months
    ** It also notes that, excluding the shock from Ukraine
invasion, oil prices were rising at 3.4%/month clip, compared to
3.2%/month in the oil rally from 2003 to 2005
    ** "The simplest argument for this step-up to a new
equilibrium is the lack of investment in fossilfuel energy
infrastructure," the brokerage says in a note
    ** It adds that the significant moves in oil prices (>20%)
matter more as higher energy prices increase the appeal of more
chemical-intensive energy efficiency investments
    ** "Surges in oil prices trigger inventory stocking, with
most chemical companies benefiting from significant operating
leverage to a surge in volumes, Jefferies notes
    ** The brokerage sees Methanex  MX.TO , Dow  DOW.N  and
LyondellBasell Industries  LYB.N  be the prime beneficiaries if
oil prices shift to a new range in H2 2022-2023

 (Reporting by Juliette Portala)
 ((juliette.portala@tr.com))