Viewpoint: Octane supply likely to drive US TX market

New regulations from the International Maritime Organization (IMO) will reduce the amount of allowed sulphur emissions in bunker fuels starting on 1 January, which is expected to increase demand for lower-sulphur refined products and shift feedstock economics.

It remains unclear if the regulations will create a longer or tighter market for octane-boosting gasoline blendstocks, but early expectations lean toward tighter because of naphtha being diverted away from reformers and toward bunker fuel production.

That tight market could support higher-than-normal prices for toluene and MX at the start of the year, as gasoline blenders typically prefer lower-cost butane during the winter blending season. But they could be required to use more toluene and MX in place of other blendstocks to boost octane levels.

Blendstock tightness lasted longer into 2019 than expected, which lent support to higher year-on-year spot prices for toluene and MX into December.

Toluene spot prices closed November 9.4pc higher year on year, while MX spot prices closed November 7.4pc higher year on year.

Since then, toluene and MX prices have come down as octane has lengthened and gasoline demand has fallen.

The higher year-on-year prices for toluene and MX came despite lower global paraxylene (PX) values.

PX is a derivative for both selective toluene disproportionation (STDP) units and MX-PX conversion units. But even as PX prices are subdued, TX prices found support in the gasoline pool and a high-octane blendstock.

US November PX contracts fell by 25pc year on year, with prices globally down throughout most of 2019, as increased capacity in Asia led to longer supply. Asian PX producers cut operating rates in the fourth quarter in an effort to restore margins and tighten supply.

This is poised to tighten byproduct benzene supply, as reductions in parex unit operations are led to lower US imports from South Korea in December. This is expected to continue in January.

Higher benzene prices have pushed STDP margins to positive on paper, although many operators are waiting for sustained positive margins before considering higher operating rates.

Tighter benzene to start 2020 could push prices higher, leading to increased demand for STDP operators.

Toluene tightness could limit STDP operating rates if supply is tight as refiners could see less octane coming out of reformers, with naphtha diverted to maximize jet fuel and diesel production.

MX demand from the chemical sector is expected to be driven by global PX operating rates, which could be volatile as Asian producers look to restore margin.

US MX buyers could also prefer to supplement domestic PX production with continued imports of PX and polyethylene terephthalate (PET).

Exports of PX and PET from Asia could be curbed by higher freight rates, driven by the low-sulfur bunker fuel regulations from the new IMO emission rule.

By John Dietrich