Market Outlook: Crude oil, benzene and the shape of things to come in Europe

The future of benzene in Europe will continue to be shaped by global energy trends REX/Shutterstock

As crude oil faces an ongoing global sea-change and downstream sectors deal with their own particular shift in supply/demand dynamics, European benzene players are unsure of how the region will adapt.

The market faces tightening supply in the coming years and will need a steady flow of imports from abroad to meet domestic demand.

While the European market has historically been a volatile, yet somewhat predictable, one in terms of pricing, shrinking regional liquidity combined with the structural backwardation will be a challenge.

From late 2011, the European benzene market saw a period of sustained bullishness (albeit one of considerable volatility as well) above $1,000/tonne, with the impact of the shift towards shale oil in the US being felt globally.

PRICE BOOST

With US benzene supply shortening with the move towards lighter grades of oil and less extraction, prices in Europe were bolstered as the market attempted to keep pace with developments across the Atlantic.

US spot pricing breached the $5/gal level towards the end of 2012, and the market has become increasingly dependent on Asian imports to cover the regional supply shortfall.

Although there are several on-purpose production methods to make more benzene such as HDA (hydrodealkylation) and TDP (toluene disproportionation), these are often not economically viable for US producers, as toluene supply and pricing inevitably face the same challenges from the shift towards shale oil and lighter feedstocks.

Similarly to the US, the European benzene market has seen a growth in structural 
imports over the past few years from countries such as India, Israel and Turkey. Eurostat data show a 15% growth in structural imports from 2012 to 2013. And 2014 saw a further 19% increase on yearly benzene imports into the EU.

With the slump in global crude oil pricing from late 2014, this saw a slight decrease in imports over the course of 2015 as naphtha cracking became more economically competitive again.

However, the crude oil/benzene ratio in Europe has remained high even as oil prices were slashed from $100/bbl and higher to the $30-40/bbl numbers seen in recent months.

The spread of benzene over naphtha saw a sharp narrowing in late 2014 as benzene prices adjusted to the plummeting of crude oil, but since early 2015 the gap between the two has largely held steady around a historical level of $150-200/tonne.

The sharp drop on benzene in late 2008 was driven by a downward correction on oil, but the key difference between then and late 2014 was demand. The wider economy back in 2008 was still reeling from the effects of the US subprime mortgage crisis and the collapse of Lehman Brothers, and consumer confidence was shattered.

While the drop in crude oil pricing from November 2014 was equally sharp and sudden, global benzene prices did not see as severe an erosion in the aftermath of this due to stronger market fundamentals.

The upturn in gasoline consumption over 2015 has also supported US benzene prices in particular, with limited aromatics extraction from refineries across the Atlantic.

The first quarter of 2016 has seen European benzene taking cues from pricing in other regions, and with Europe the highest priced region as the second quarter approaches, many domestic players are confused about what the driving factors are.

“The benzene market is totally volatile right now,” said one industry player speaking on the sidelines of the European Petrochemical Luncheon (EPL) in Madrid, Spain, earlier this month. “It is following the crude oil price up and down. There are no fundamentals really steering the market.”

LACK OF EUROPE LIQUIDITY

One factor to consider with regards to the price volatility in Europe is the growing lack of liquidity in recent years. With many players unwilling to build inventories and traders shying away from taking big positions in an uncertain macroeconomic landscape, there is an increasing reliance on barge volumes to meet requirements.

This keeps spot pricing prone to sharp movements, as players will opt to cover positions in the short term on the spot market rather than hold inventory. There is also a constant pressure on the front end of the market due to the CIF (cost, insurance, freight) delivery terms, largely keeping the market backwardated and limiting any structural supply relief from imports.

For several benzene traders, the key question is why Europe has been the highest priced region so far in 2016. There has been a steady flow of imports from India and the Middle East as well as ample availability of feedstock pygas.

One source noted that the market has not seen industry players selling material en masse recently, suggesting that demand among downstream sectors is strong. However, there are several downstream styrene turnarounds on the horizon, which is likely to limit benzene consumption in April.

And a spread of around $400/tonne between the two products supports healthy EB/SM (ethyl benzene/styrene monomer) production economics, and this should see other units run hard to capitalise on this.

Looking further ahead, there is a sense that the fortunes of crude oil will continue to play an integral role in driving benzene prices. Brent prices have recently pushed back above $40/bbl, and the US rig count has dropped since late 2015, as the impact of lower pricing has been felt among shale producers.

SAUDI STRATEGY

Whether this is a sign of continued upward momentum on crude oil for the rest of 2016 remains unclear though. The impact of the Saudi long game to maintain market share on their internal economy is increasingly palpable and many observers believe they have misjudged the resilience of the US market.

There is also an expectation that fracking costs will come down further this year, adding more potential supply to the global market. But other market observers believe that the strategy of the Saudis has less to do with market share than a move away from oil as a fuel altogether.

“Oil is on its last legs as a fuel,” says Paul Hodges, chairman of International eChem. “It will eventually be left in the ground just like coal.”

There is also a renewed focus on petrochemical production in the region, with an expansion of the Petro Rabigh site and the Sadara joint venture between Dow Chemical and Saudi Aramco both expected to come online this year.

This means that any structural tightness for benzene in Europe is unlikely to be satisfied by Saudi export volumes in the near future, as they utilise the material for derivative production.

The backwardated structure of the European market, combined with lead times of at least two months makes it challenging to bring material into the ARA (Amsterdam, Rotterdam, Antwerp) region, and with China still importing benzene from markets such as India, this will also limit how much can be brought into Europe.

“One of the big problems for traders and consumers is that we in Europe are not yet talking about benzene prices closer to $200/tonne than $650/tonne or $700/tonne,” said Hodges. “Financing costs are a real challenge at current price levels.”