Methanol diverges from crude oil as supply-demand dynamics dominate

China's methanol futures have shown a lack of advancing momentum with some corrections. When oil prices rise, methanol's gains are subdued; and as soon as crude shows signs of weakness, methanol price falls back rapidly.

The recent energy market has been driven by geopolitical risks. The conflict in the Strait of Hormuz has escalated, and the Houthis attacked two Saudi oil tankers. The escalation has driven crude oil prices to continue the upward movement.

However, China's methanol futures have shown a lack of advancing momentum with some corrections. When oil prices rise, methanol's gains are subdued; and as soon as crude shows signs of weakness, methanol price falls back rapidly.

This notable divergence indicates that the market's main trading logic has fundamentally shifted: methanol is now driven more by its own fundamentals, rather than moving in tandem with crude oil and commodities.

Fundamentals of methanol in China:

On the demand side, methanol's downstream industrial chain is mired in low profit margins. Methanol costs have risen compared with earlier periods, but the cost pass-through in both traditional sectors such as formaldehyde and dimethyl ether and in methanol-to-olefins (MTO) sector, is severely hampered. Downstream profits are being squeezed as feedstock prices rise, even slipping into losses.

At present, multiple coastal standalone MTO units, relying on outsourcing methanol, have been shut down due to the negative margins and feedstock shortages, with the overall operating rate at coastal regions hovering at only about 20%, sharply compressing methanol demand.

Traditional downstream sectors are also weak. Formaldehyde is in its seasonal slack period, with the construction and plywood industries generally sluggish. Although acetic acid and MTBE have expectations of plant restarts from earlier maintenance, given the currently high feedstock prices, there's limited room for profitability, so procurement of high-priced methanol will be significantly restrained. Restocking actions will most likely be limited to essential needs. Hence, overall weakness in demand directly caps methanol's upside price potential.

In addition, China's methanol supply is seeing a staged return, and inventory build expectations are materializing as scheduled. This week marks a key turning point in the shift of methanol's supply-demand pattern.

Following the earlier US-Iran memorandum, increasing supply from the Middle East are arriving in China in mid-to-late July, and the port inventory begins to rebound. As a result, this weakening of nearby fundamentals becomes the pressure on methanol market.

Although some China domestic units are still under maintenance in July, the lure of high prices in August will significantly boost enterprises' enthusiasm for resuming production, with maintenance likely to be completed earlier than expected. Domestic supply is expected to return to elevated levels, and the forward supply-demand balance still faces severe tests.

For now, therefore, oil prices provide only a temporary floor for methanol, but cannot bolster methanol to rise continuously. Once oil prices show any sign of correction, methanol's fundamental fragility will be fully exposed, triggering a sharper decline.

Going forward, methanol's pricing logic will be more driven by fundamentals. Even if crude oil continues to rally, its boosting effect on methanol will marginally diminish; but if crude turns weaker, methanol will face even greater downside risks.