Viewpoint: US Rbob change to support European toluene

European toluene prices will be supported in 2021 by demand for aromatic blending components arising from US Rbob gasoline specification changes.

The US Environmental Protection Agency (EPA) will remove testing requirements for aromatics content in reformulated gasoline from 1 January. This will reduce the Reid Vapour Pressure (RVP) limit to 7.4psi from 7.8psi in summer-grade specifications and get rid of winter-grade specifications altogether. Limits on benzene and sulphur will remain.

The changes will allow increased blending of high-octane, low-RVP components toluene, mixed xylenes (MX) and reformate into gasoline for export to the US, although the benzene content of typical reformate streams of 2-3pc will limit the amount of untreated reformate that can be blended. Increased blending of aromatic components such as toluene and MX will benefit blenders by allowing greater flexibility in blending other components such as ethanol and naphtha.

Exports of gasoline and blending components will remain supported to the US Atlantic coast next year, where refinery shutdowns have increased regional reliance on imports. The region's largest refinery, PES' 330,000 b/d Philadelphia plant, is permanently shut, and PBF has reduced capacity at its 180,000 b/d Paulsboro refinery in New Jersey by 85,000 b/d. On average US refiners operated at under 80pc of capacity in the fourth quarter, and at 10-15pc below year-ago levels. Refiners on the Atlantic coast have been hit harder, with New York Harbor plants averaging just 70pc of capacity between September and November.

US octane supply could tighten in the early part of 2021 if demand for gasoline rises, with increased refinery utilisation likely to lag. US blenders are building octane stocks, leading to increased demand for European toluene. This is likely to continue through the first quarter ahead of the summer driving season, either in the form of pure toluene or toluene blended into gasoline. Export activity is likely to pick up further over the peak summer driving season.

Western Europe will remain a net exporter of toluene. More than 250,000t left the EU-15 in the first 10 months of the year, with 108,000t of this heading to the US. European refineries have also reduced runs throughout 2020, with rates struggling to rise much above 70pc on average. This has curtailed toluene-from-reformate supply and is likely to continue to limit toluene supply in the first half of 2021.

Demand for toluene from the European petrochemical sector will steadily recover in 2021. Downstream TDI units are running at high rates following planned and unplanned shutdowns by all European producers during the second half of 2020. Rates are likely to ease in 2021 as stock levels build back up, although this could be partially offset by improved demand from the automotive sector. However, that is unlikely to get back to pre-Covid levels in 2021.

Conversion economics have been positive throughout the fourth quarter of 2020, but these will begin to narrow early in 2021 as benzene prices ease on improved supply. Toluene prices could be buoyed by firmer underlying gasoline values if demand seasonally picks up. This will narrow the benzene-toluene spread, squeezing both hydrodealkylation and selective disproportionation margins and restricting domestic demand for toluene.

But benzene prices will remain relatively firm throughout the first half of 2021 because of a heavy first-quarter cracker turnaround schedule and a seasonal pick-up in demand in the second quarter. The spot benzene-toluene spread rose above $300/t in December for the first time in three years, well above the $19/t average in the first nine months of the year. The steep benzene backwardation is likely to push the spread back below $200/t during the first quarter of 2021, but above the $90/t averaged in the first quarter of 2020.

By Sam Carew