OUTLOOK ’18: Tightness in US benzene supply may ease in Q1

HOUSTON (ICIS)–US benzene supply concerns may see some easing in the first quarter, following a strong run-up in prices during the fourth quarter of 2017, driven by prompt supply shortages.

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Refinery operating rates in the US are typically lower during the winter months as compared to the spring and summer months, given stronger demand for gasoline in the spring and summer, suggesting that refinery rates will open 2018 at relatively low rates. This seasonal affect may be somewhat countered this year by efforts to restore normal operations after the disruptions caused by Hurricane Harvey.

According to data from the American Fuel and Petrochemical Manufacturers (AFPM), refineries account for a little more than half of US benzene output, with ethylene unit co-production and on-purpose production accounting for the bulk of the remainder of US benzene production.

Benzene demand in the US is anticipated to be largely steady from the prior year as most of the main downstream outlets for benzene, such as the styrene and phenol markets, are anticipated to see mostly steady demand.

Spot benzene prices shot up by 86 cents/gal ($259/tonne) in a five-week period from mid-October to mid-November as an unexpected dip in US refinery operating rates, some difficulties at producers’ aromatics extraction units and delayed import shipments combined to push prices for prompt material higher.

The strong premium these events put on prompt cargoes was most clearly seen in the emergence of a steeply backwardated market during the fourth quarter, with current-month spot prices trading at a premium of as high as 27 cents/gal on the week ended 17 November, the point at which spot prices for the current month reached a 2017 peak. The benzene market was in contango for most of the first three quarters of 2017.

US refineries had been operating at high utilisation rates during the weeks immediately preceding the impact of Hurricane Harvey on the US Gulf Coast, with rates averaging just under 97% on the week ended 25 August, the last full week before the hurricane, according to data from the US Energy Information Administration (EIA). Refinery operating rates plummeted to 79.7% on the following week and sank to 77.7% on the week ended 8 September prior to rebounding.

Refinery utilisation rates slowly climbed through much of September and October before unexpectedly dropping from 89.2% on the week ended 6 October to 84.5% on the week ended 13 October. Operating gradually climbed over the next several weeks, helping to ease the supply shortage in the US benzene market.

Imports were also a key factor helping to mitigate the supply shortage. A large volume of material was exported to the US from Western Europe in the fourth quarter, with ICIS estimating that around 130,000 tonnes of European benzene was shipped to the US Gulf between late September and mid-November.

The strong desire for imports from the US buoyed the European benzene market during the fourth quarter, sending spot prices on a cost and freight (CIF) Amsterdam Rotterdam Antwerp (ARA) basis to the highest levels seen since late February.

Operating rates at on-purpose benzene production units such as toluene disproportionation (TDP) and selective toluene disproportionation (STDP) units are another factor that may help ease benzene supply tightness in the first quarter.

TDP and STDP operating rates plummeted in the wake of Hurricane Harvey’s impact, both due to a lack of raw material as well as the fact that a sharp post-Harvey spike in gasoline prices encouraged refiners to leave most of their available toluene in the gasoline pool rather than extracting it for chemical usage. Toluene is used as a feedstock for TDP and STDP units, which produce a mixture of benzene and xylenes.

TDP operators generally aim for a premium of at least 25-30 cents/gal for spot benzene prices over spot toluene prices to justify the economics of running the units. The spread between benzene and toluene prices narrowed sharply in the immediate aftermath of Hurricane Harvey but widened sharply between mid-October and mid-November, encouraging higher operating rates at TDP and STDP units.

TDP and STDP economics may well remain favourable into the first quarter as the benzene supplies gradually stabilise. Toluene demand typically a seasonally slow period during the winter months as gasoline blenders can opt for cheaper octane boosters such as butane during the winter gasoline season.

Gasoline blending and use as a feedstock for TDP and STDP are the two largest outlets for toluene demand in the US.

Benzene is a key petrochemical building block used as a feedstock for the production of a number of downstream chemical products including styrene, phenol, methyl di-p phenylene isocyanate (MDI) and nylon resins.

Major US benzene producers include ExxonMobil, Flint Hills Resources, LyondellBasell, Marathon Petroleum, Shell and Phillips 66.