European toluene prices are likely to be supported in 2023 by strong demand for high-octane components, particularly from gasoline blenders in the peak summer driving season. But prices are unlikely to reach the record highs seen in 2022.
Demand for octane components like toluene soared in the middle of 2022, as an oversupply of naphtha extended the gasoline-naphtha spread to above $600/t and incentivised refiners to capture the upgrade cost by blending more light, sub-octane naphtha. Toluene premiums to gasoline reached record levels of around $450/t.
While the gasoline-naphtha spread has narrowed towards $100/t in December, and a boom of the same proportions is unlikely to be repeated, the naphtha oversupply will probably continue into 2023.
Most US Gulf Coast refineries have excess naphtha, with exports rising to 300,000 b/d since the start of the pandemic from close to 200,000 in early 2020. European refineries have increased production of light ends as they shift to a lighter, sweeter crude slate, partly to compensate for high hydrogen costs and the need for further desulphurisation. The oversupply has been exacerbated by a fall in Asia-Pacific demand for European naphtha, caused by China's zero-Covid policy hitting consumption.
Exports of naphtha from Europe to Asia-Pacific hit 1mn t/month in 2021, but fell to 570,000 t/month in the January-November 2022 period and were just 350,000t in May. Even with a recovery in Asia-Pacific demand, exports from the Mediterranean will struggle to return to pre-pandemic levels as product from the Mideast Gulf and Russia will head east first.
Arbitrage opportunities to the US will probably continue to provide a floor for European values. Net naphtha exports from western Europe were around 330,000t in 2020 and 2021, with more than 120,000 t/yr sent to the US, but this has declined following European plant closures. Versalis' 50,000 t/yr unit in Porto Marghera in Italy closed in 2022, and Galp's 140,000 t/yr toluene unit in Porto, Portugal, closed in 2021. The combination of these closures does leave Europe open to potential supply shocks.
The EU-15 exported more than 46,000t of toluene to the US in the first nine months of 2022, and exports picked up in the fourth quarter as the economics became more favourable. With European chemical demand likely to remain limited into the early part of 2023, producers will again look to export across the Atlantic. European downstream demand for TDI has been weakened by concerns about a recession, which would mean falling demand for use in applications like mattresses or in the automotive sector. High feedstock and energy costs have been capping rates across Europe, and chemical buyers will again have to compete with the gasoline pool next year.
Many TDI plants were down for planned and unplanned maintenance in the second half of 2022, and some are extended into 2023.
Toluene will probably again be affected in 2023 by sustained high gas prices, which have weighed on producer margins and led to reduced extraction rates. The Dutch natural gas TTF Day-ahead price peaked at €308/MWh on 25 August, up from €45.20/MWh a year earlier. Prices have since declined, but remain at historically high levels and were back above €100/MWh in December and the forward curve shows them staying there for much of the first quarter of 2023. This is likely to encourage producers to keep extraction rates limited and potentially step into the spot market to meet their contractual obligations rather than ramping up rates.
There is particular concern in Germany about winter 2023. While gas storage was partially filled by Russian imports in 2022, these are unlikely to be available again.
