NW Europe toluene premium over Ebob (daily, US $/t)

Aromatic octane found in reformate, and separated and processed aromatics such as toluene, mixed xylenes, is now increasingly important to a refiner to balance out these sub-octanes, particularly given the move to lower sulphur Tier 3 gasoline specifications in the US. We saw this over the summer months with European toluene values rising to record premiums over gasoline of more than $450/t. Although values have since eased, they remain elevated at or above previous record highs.

The naphtha “problem” is likely to persist

Most US Gulf coast refineries are long naphtha, with exports of naphtha rising to more than 300,000 b/d since the start of the pandemic. Due to growing impact of domestic light crudes in refinery feed slates and refiners also dropping as much heavier material into the higher margin distillate pool as they can, these naphtha surpluses are growing and are mostly light and paraffinic.

It is a similar situation in Europe, which has seen a shift to a lighter, sweeter, crude slate in order to compensate for high hydrogen costs and the need for further desulphurisation. At one stage naphtha margins to North Sea Dated crude fell to over a $40/bl discount this year. Weak Asian petrochemical demand, partly caused by China’s zero-covid policy and on-off lockdowns led to eastbound naphtha exports from the Mediterranean falling sharply this year and adding to northwest European oversupply. Last year an average of 1mn t/month of European naphtha moved to Asia-Pacific but this dropped to a low of just 350,000t in May and has averaged around 500,000 t/month so far this year. Even with Asian demand likely to begin to recover next year, exports from the Mediterranean are unlikely to reach “normal” levels as they face competition from cheaper Russian material that is more likely to head east.

Gasoline supply also tightened following the Covid pandemic as refinery rates lagged the increase in road fuel demand, leading to a drawdown in stocks through 2021. The loss of over 2mn b/d of refining capacity in the US and Europe since 2020 has meant those refineries that are left have been running at high rates this year, either at or above pre-pandemic levels on a percentage basis. Reformers, particularly in Europe, have also been running at high rates for by-product hydrogen.

These factors are expected to weigh on naphtha margins and pricing next year and potentially into 2024 which will keep the gasoline-naphtha spread above historical norms and supporting elevated values for aromatic octanes.

Firm reformate prices squeezing aromatic extraction margins

With gasoline pulling in large volumes of reformate and aromatic octane, this will keep outright reformate values elevated through next year and likely into 2024. The pull on octane is not expected to be as severe next year, so premiums over gasoline for these components will not be at the record levels seen this summer. This will impact aromatic extraction margins not just in the Atlantic Basin, but in the Middle East as well.

NW Europe Ebob premium over naphtha (daily, US $/t)

Petrochemical demand usually plays second fiddle to gasoline blenders in a refining system, but this year has been on a whole other level and petrochemical producers and consumer are going to have to adjust next year if, as expected, the pull from octane remains strong. Increasingly operators are finding it more economically attractive to blend reformate away rather than pay to extract toluene and xylenes that would most likely just end up back in the gasoline pool anyway.

This has also led to a disconnect between aromatic margins over naphtha and reformate. Traditionally benzene’s premium over naphtha and reformate have moved mostly in tandem. But these spreads disconnected from the second quarter as reformate values firmed and have held above benzene since August, squeezing margins for refinery-based benzene recovery which is a significant portion of supply. In the Middle East around two thirds of benzene production is from reformate, with the rest coming from pygas-based or conversion units. Meanwhile the “traditional” naphtha-to-benzene spread shows strong margin performance for steam cracker-derived by-product benzene. Around 15,000-20,000 t/month of Middle Eastern benzene is usually sent to Europe.

Benzene content in gasoline is capped – to below 1pc – so it does not feel the pull from gasoline as much as other aromatics. But it does instead get squeezed from the up-and-downstream. Its feedstocks reformate and pygas can be blended away, while downstream products such as ethylbenzene, cyclohexane and cumene were increasingly sought by blenders this year for their octane content.

Paraxylene (PX) producers have been particularly impacted by the surge in octane demand. High prices for feedstocks reformate, toluene and MX have led to PX margins being squeezed across the board and operating rates being cut in the Middle East, Europe and the US. Chemical players in the region have mostly been unwilling to compete with what blenders have been willing to pay, either unable to pass on large price increases downstream or instead looking to import cheaper downstream polyethylene terephthalate (PET) from Asia.

On paper it may look like PX margins are healthy, with the PX-naphtha spread over €600/t in Europe in the third quarter. But this fails to paint the whole picture, with the majority of that margin being locked up in reformate or MX – for three months over the summer average monthly MX prices were above PX. Under these circumstances it is obviously not economic to run these units and increasingly PX producers are selling feedstocks to the gasoline pool instead.

NW Europe benzene spot market premium over naphtha and reformate (daily, US $/t)

NW Europe disproportionation (STDP) economics (monthly, US $/t)

Argus modelled European selective disproportionation (STDP) margins have been well below breakeven this year, hitting record lows in the second quarter. Producers managed some slight margin recovery since, but cash margins are still around a €100/t loss. Isomerisation units have also seen weak margins this year with feedstock MX pricing being driven by blending demand. With octane set to be tight again next year, operators will struggle to run at decent rates particularly over the summer months.

The Middle East will continue to be able to send some PX to Europe – around 30,000 t/month – but these volumes will not be enough to incentivize a ramp up in production.

In Turkey, plans for a new PX and benzene unit have repeatedly been pushed back as high reformate prices over the next couple of the years impact the investment case. Instead it is currently more feasible to continue selling out reformate.