Increased toluene prices driven up by prompt-month shortages in the downstream benzene market in Q4 2017 are expected to decrease in Q1 2018 amid expectations of increased benzene availability in early 2018.
Although refineries in the US traditionally run at lower rates in the winter months due to seasonally slower gasoline demand compared to the spring and summer months, operating rates in 2018 may be somewhat higher than usual as producers redouble their recovery efforts following the impact of Hurricane Harvey on production in the US Gulf in the second half of 2017.
As such, toluene supplies are expected to grow long into the 2018, putting further downward pressure on the market to soften, particularly as production issues in the benzene market ease and alleviate demand for toluene for on-purpose benzene production.
The spread between US spot benzene and toluene is thus expected retreat from highs seen in late 2017 but is still anticipated to be favorable until benzene supplies reach more comfortable levels.
Therefore, margins for toluene disproportionation (TDP) and selective toluene disproportionation (STDP) units, which convert toluene to benzene and xylenes, are expected to remain in favourable territory in Q1 2018.
According to trading sources, TDP operators generally look for a spread of at least 25-30 cents/gal between benzene and toluene to justify conversion unit economics.
TDP and STDP operating rates were severely impacted in the wake of Hurricane Harvey, both due to a lack of raw material as well as a jump post-Harvey gasoline prices, encouraging refiners to leave most of their available toluene in the gasoline pool rather than extracting it for chemical usage.
Harvey prompted the spread between benzene and toluene prices to narrow dramatically in the immediate wake of Hurricane Harvey but widened sharply between mid-October and mid-November, encouraging higher operating rates at TDP and STDP units.
Demand for toluene is expected to then more broadly soften as gasoline prices drop to more seasonable levels and the market adjusts to winter gasoline requirements, during which gasoline blenders often opt for butane as a blendstock rather than traditionally more expensive toluene and xylenes.
Gasoline blending and use as a feedstock for TDP and STDP are the two largest outlets for toluene demand in the US.
Toluene is most commonly used as a chemical feedstock for on-purpose benzene and paraxylene (PX) production or as a gasoline component to boost octane. Nitration-grade (n-grade) toluene is typically used for chemicals and commercial grade toluene (c-grade) or off-spec n-grade is typically used for fuel blending, but strong demand in either grade can limit supply for both.
As an octane component in fuels, toluene is in its strongest demand season during the summer when fuels must be less volatile. During the winter, fuel blenders can use less expensive octane boosters like butane. The summer fuels season runs through mid-September.
As a chemical feedstock, toluene is converted to other aromatics generally through the use of TDP units which produce benzene and mixed xylenes (MX) or STDP units which produce benzene and a PX-rich stream of MX.
Major US toluene producers include ExxonMobil, Flint Hills Resources, Total, Valero, Marathon Petroleum, Shell and Phillips 66.