Arbitrage window open from Europe to US for toluene, xylenes

Focus article by Zachary Moore

HOUSTON (ICIS)–The arbitrage window from Europe to the US has remained open for both toluene and xylenes for the past few weeks owing to strong demand for gasoline blending components in the US.

Exports of finished gasoline from the US have been rising recently, particularly to Mexico, which is the largest destination for US gasoline exports. Sources pointed to inefficient refining operations in Mexico as well as the fact that refining capacity has not been keeping up with demand growth as the main reasons for the large jump in US gasoline exports to Mexico. 

In the third quarter, Mexico’s refinery output fell to an average of 980,000 bbl/day, down 30% from 1.4m bbl/day in Q1 2010, the earliest date of ICIS statistics. In September 2016, refinery run rates were just 46%, according to the National Chamber of Industry (Canacintra). For comparison, rates in the US often exceed 90%.

According to data from the Energy Information Administration (EIA), US exports of finished gasoline to Mexico were up 37% in the January-October period of 2016 relative to the same period of 2015. According to the EIA, Mexico absorbed 59% of all US gasoline exports in October of 2016.

Source: EIA

According to ICIS data, spot prices for mixed xylenes (MX) in the US are currently trading with a premium of around $135-140/tonne over European MX while US toluene is trading with a premium of around $110/tonne over Europe.  With freight rates for 5,000-tonne parcels from Europe to the US currently being quoted at around $40/tonne, the arbitrage for both products remains open. 

A 3,500-tonne toluene parcel was fixed between northwest Europe and the US this week. Last week, sources stated that some cargoes of mixed aromatics for gasoline blending were shipped from Europe to the US. 

Players in the European MX market have seen a growing interest this week in trans-Atlantic export business. The US market has seen an upturn in demand for blending components from the gasoline pool, which has pushed prices for MX higher. This upward momentum has also helped galvanise European spot numbers this week despite the overall dip in crude oil and gasoline values.

With crude oil and gasoline prices easing off over the course of this week, European spot numbers for toluene and mixed xylenes have failed to see any major upturn in line with the bullishness in the US. Premiums for toluene over the Eurobob gasoline average monthly quote have been seen between $90-100/tonne, with some industry players bidding slightly higher. 

With gasoline spot prices dropping below $540/tonne FOB (free on board) this week, this is keeping the trans-Atlantic arbitrage window open. Offers for MX and toluene were also seen as high as $670/tonne, but buying interest was still in the low $600s/tonne.

Yet despite the widening spread between the two regions, European players noted that the logistical issues stemming from the low Rhine water levels this month has hampered trading and shipping activity. Cargo ships travelling along the Middle Rhine between Bingen and Bonn, Germany, are currently unable to carry more than 25-40% of their capacity, according to the Rhine Shipping Authority (WSV).

While no fixtures of MX were reported between Europe and the US this week, a parcel of MX was fixed for shipment between Northeast Asia and the US.  US MX prices are currently trading with a premium of around $90/tonne compared with Asian isomer-grade xylene. With freight rates for 5,000 tonne parcels from South Korea to the US currently being reported in the low $30s/tonne, the US could also begin to draw in more material from Asia as well. 

A trading source in the US said that toluene and xylene demand has been mostly driven by demand for gasoline blending components.  Strong gasoline demand has kept up some upward pressure on US toluene and xylene prices, while sources commented that the flow of toluene and xylene imports to the US is acting to mitigate the full effect of the boost in toluene and xylene demand from gasoline blenders.

In addition to demand from gasoline blenders, US toluene demand is also receiving support from sharp upward movements in US benzene prices. US toluene prices are currently trading at a discount of around 80 cents/gal relative to benzene. With US operators of toluene to benzene conversion units normally looking for a spread of 20-25 cents/gal between toluene and benzene to justify conversion unit economics, toluene to benzene conversion economics are looking increasingly attractive.

Additional reporting by Truong Mellor