What should purchasing managers of benzene derivatives look for when analysing its spread with crude oil?

An argument can be made that no monomer chain has been thrust into the doldrums from the pandemic more than the benzene chain.

Yes, there are pockets of demand for polycarbonate (PC) for use as a clear barrier and polystyrene (PS) in single-use applications such as takeaway food packaging, but both seem destined to be short-lived stopgaps. Nylon, PC and phenolic resins have heavy exposure to the automotive industry’s woes, and until that sector mounts a sustainable recovery, one wonders how the benzene market will find any sustained bullish sentiment.

This chart shows the depth of destitution for benzene. It usually carries a substantial premium to Brent crude oil and broadly takes pricing direction from it. But that premium in the US market evaporated as coronavirus swept over North America, dropping from a $1.30/gal spread in February to a 28 cent/gal spread as of 12 June. While benzene is still taking pricing cues from crude, it has maintained that tight spread since April.

Something assuredly has to give, as historic pricing dynamics show this narrow spread to be unsustainable. A steep V-shaped economic recovery would help benzene outpace crude oil higher, but that seems unlikely barring the sudden availability of a coronavirus vaccine or strong therapeutic that prevents serious effects of the illness.

Absent that, crude oil looks to be what will give, and it has the ability. Crude prices have been steadily climbing since April’s race to the market bottom, mostly on sentiment that production was slowing due to increased OPEC+ cuts and US shale drillers closing uneconomic wells. But there still remains a lot of crude in the supply chain – A LOT, as in the highest inventories on record at the Cushing, Oklahoma, hub. That inventory continues to build, and eventually that has to go into refineries and come out as products such as gasoline and benzene. Crude oil’s bounce off the April bottom seems to have built some froth at the top, so it would not be a shock to see that market find weakness in the coming months but not take benzene too far along on the ride, thus helping build back that margin.

But the benzene-crude spread will not return to historic levels until economies and the consumers within them return in force. Here’s hoping for all of us that that time comes soon.

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