Argus’ aromatics and fuels and octane experts Simon Palmer and Roel Salazar talk to Jeff Eickholt.
• The increased demand for aromatic octane components in the U.S. during 2022 and what has changed since
• The impact on the recovery of aromatics products for chemicals
• The knock-on impact on other components like MTBE
• The repercussions overseas and the outlook for 2024
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Jeff: This is Jeff Eickholt. I'm a senior market analyst covering aromatics and MTBE. I'm here with Simon Palmer, vice president of Aromatics, and Roel Salazar, our MTBE consultant. So thank you for joining us for this podcast on octane blending.
Simon: Thanks, Jeff.
Jeff: So, Simon, Roel, what do you think first propagated the increased demand for aromatic octane components in the U.S. during 2022?
Simon: It's much more of a naphtha story than anything else. You'll remember we were emerging from COVID and have a rather imbalanced recovery in terms of demand for fuel products. And the Gulf Coast and Europe, to a degree, were wrestling with the surplus of light naphtha, and the market was clearing into the steam cracking market in Asia. And then all of a sudden, in the spring of 2022, that market fell off a cliff. To illustrate, U.S. exports out of the Gulf Coast of light naphtha to Asia went from about 400,000-450,000 barrels a day down to about 100,000 barrels a day in the blink of an eye. And this gave U.S. refiners a real problem because you had this surplus of light naphtha building at a time when they were struggling to produce gasoline with full Tier-3 compliance, which required them to do things that they hadn't done before.
And so you got this curious situation where naphtha prices started to fall as gasoline prices started to rise. And generally, historically, naphtha and gasoline tend to move in at least the same direction. And what developed was a very large spread between gasoline prices and naphtha prices, which gave refiners and blenders a huge opportunity to blend light naphtha up to gasoline. And really, there are only very few octane components that enable you to do that, and reformate and aromatics products are the components that you can do that with. So you had a over-$2-a-gallon incentive, which is more than $600-a-metric-ton incentive, to blend naphtha up to gasoline. And that was really what propagated the pool on aromatic octane.
Jeff: What has changed in 2023 to help moderate the situation?
Simon: Things are better this year. If you remember last year, you had prices for aromatic octane and reformate getting up well above six, even seven dollars a gallon. And we haven't seen those extremes during 2023, certainly thus far. One of the big changes was that last year there was a huge incentive to drop as much good-quality naphtha into the distillate pool because of the huge cracks that were available to refiners for making diesel. That's not happening this year.
Also, you've had a year of learning with the refiners, where they've been able to develop strategies to get much better value out of their naphtha pool by segregation and by processing of naphthas, which used to be blended together and a lot of that value was lost. Refiners have also learned a lot more about what it takes to comply with full Tier-3 requirements right across the fuels pool, and that's enabled them to tackle this year from a much better position. You have had some improvements in the market in Asia as well, with a rebound in exports back up to maybe 200,000 barrels a day. I think a lot of this is learning on the part of the refiners and being able to make better use of the naphthas that they've got.Now, all this being said, we have seen reasonably strong spreads develop yet again between gasoline and naphtha. Not above $2 a gallon, but certainly, we've seen peaks around $1.50 and also reformate up to about $1.15 over gasoline. So it is more subdued than it was last year, but certainly, there is still ongoing requirements for aromatic octane.
Jeff: What has been the impact on the recovery of aromatics products for use by the chemical industry?
Simon: The reality is that the market for reformate has been strong because of the reasons we've talked about. And reformate is the feedstock for most of the aromatics recovery that goes on here in the Gulf Coast. And therefore, high costs leads to a situation where the recovery of aromatics for the chemical industry just hasn't provided any economic incentive and therefore has been significantly cut back. We've also seen products like toluene and xylene back-blended into the gasoline pool after they've been recovered, and we've also seen other products across the aromatic suite, such as ethylbenzene, cumene, para-xylene, and cyclohexane even, bought out of the chemical markets back into the fuel blending market.
One of the reasons why benzene derivatives have been highlighted aggressively by the blenders is that benzene has been comparatively cheap. Benzene has struggled price-wise to get above reformate for most of the year so far. And because you can't blend benzene directly into gasoline but you can blend the derivatives, those derivatives, like ethylbenzene and cumene, have been in demand by blenders because they've provided a much better value than any other component because the benzene piece of that is undervalued.
Jeff: Roel, what has been the knock-on impact on other components, including MTBE?
Roel: Due to the situations that Simon discussed, summer gas and blending has become much more competitive. So we're seeing high-octane components traded at higher values. And then, on the contrary, we're seeing low-octane high-RVP products trending at a lower discount to gasoline prices.
When it comes to MTBE, the component's not blended for gasoline consumed in the U.S., it's only blended for gasoline exports. And what we see is whenever there's a big demand for octane components, let's say reformate alkylate, it means that there's less of those products available for blending for the export market. So that's kind of where MTBE comes into play. So MTBE normally is priced much cheaper than reformate and alkylate. And so blenders will look at this component for those exports. And as a result, MTBE does see some price support from the octane markets in general. The outlets for MTBE are limited, so that's one of the reasons why there's not a huge support for MTBE, because of the limited outlets.
Then one of the things I would like to mention is that MTBE is mandated in the metropolitan zones and in Mexico. So, they need this product. So sometimes whenever there's not MTBE in the market, MTBE can go outside of octane blending fundamentals. I mean, if we're looking at what's going on currently in the MTBE market, it's trading well above blend value, it's trading well above reformate alkylate, but once supplies are stabilized, we can see MTBE go down to the value of gasoline or even below it.
Jeff: Have there been any repercussions overseas?
Simon: Last year there were some tremendous repercussions. Europe exports a lot of finished gasoline and components to the U.S., particularly the U.S. East Coast. And the extreme values that we saw last year were reflected in pooling up the values of both gasoline and blending components in Europe as well. This year, it's been a little more muted, but certainly, it's put a floor underneath the marketplace.
The biggest impact's really been more in Asia, where a lot of blenders and trader blenders positioned to move large quantities of aromatic blending components from Asia to the U.S. in anticipation of the potential of a very strong octane season this year, in 2023. And certainly, we saw quite a lot of volume moving either as toluene, xylene, para-xylene, and that's kind of faded a little bit as the market has sort of topped out. But certainly, it's made a difference to Asian producers who were struggling to place material into the petrochemical market.
Jeff: You had mentioned earlier that even some of the benzene derivatives were being affected. Can you describe some of the impacts?
Simon: In some ways, this is unprecedented. Probably the biggest product that we've seen a major change is ethylbenzene, which is an intermediate for the production of styrene monomer. And that really had not been blended in any quantities at all in the past. And that really has seen a new lease of life fall direct into gasoline blending, where it's a high-octane low-vapor-pressure component, which is highly valued by the blenders. And this coincided with a period where styrene demand was particularly lackluster in the petrochemical markets. So a lot of styrene producers who are able to have been making ethylbenzene intermediate and selling it in volume to the blending market.
Cumene also has been blended in quantity this year. But cumene historically has been blended on and off into the marketplace. And, normally, it's a way of moving either inexpensive benzene into the gasoline pool or, in some cases, with cumene undervalued, propylene into the blending market. An anomaly we saw this year was the fact that there were quantities of para-xylene moved from Asia into the U.S. for blending, which we've really not seen before. But that faded pretty quickly when the increases in octane value that some of the traders expected during Q1 really came a little bit later. Otherwise, we've seen cumene taken back from the chemical businesses of an integrated refiner back into the blending side of the business. And we've also seen benzene hydrogenated into cyclohexane and then drawn back into the blending side of the business. So it's had a number of different impacts.
Jeff: And what are you expecting for the future years?
Simon: $6-million question. I think in terms of how this has transpired and how it's progressed through from last year, where it was unprecedented and, to a great degree, unforeseen by many refiners, we're on a learning curve. And I think this year, as I've mentioned, things have settled down a bit. Refiners have learned a lot more about how to comply with full Tier 3, and also the trader blenders are becoming more experienced around acquiring the full range of blend components. That being said, the petrochemical companies are also becoming better educated and able to get a fair value for their products. So I think things have gone some way up the learning curve, and we expect that to continue next year.
We're also expecting that the cracking market in Asia will improve marginally during 2024. So clearing the naphtha market for exports into Asia should be a little easier. Prices should be a little better. We're also seeing some refiners on the Gulf Coast continuing to refine and improve their processing complexes. So we think that this will help as well. And also there are alternative sources of octane being developed in terms of not only alkylate but also isomerate, which will help provide more octane barrels to the blending market and, therefore, take some of the pressure off reformate. I think in overall terms, you know, there's a learning process, and as time goes on, the ability of the refiners to react and adapt always tends to solve these problems given the time.