Profits On This Obscure Commodity Are Up 570%

I've talked a lot about U.S. shale drilling--and its effect on specialty chemicals markets.

We've seen a major impact lately in sectors like natural gas liquids. Where surging U.S. production of propane and butane has begun to alter the global market for these products.

But news last week suggests that shale drilling is actually creating a shortage of one group of commodities. Leading to some of the most powerful price appreciation we've seen anywhere in natural resources recently.

Platts reports that U.S. contract prices for the chemical benzene hit a record in July, coming in at $5.28 per gallon ($1,580.30/mt). Benzene is an aromatic hydrocarbon, used in making high-value petrochemical products that feed into production of rubber and plastics.

The problem is, America isn't making nearly as much benzene as it used to. Thanks to the shale revolution.

A good portion of U.S. benzene production used to come as by-product from the making of other petrochemicals like ethylene. Processing plants called "reformers" would take in heavy, oil-based hydrocarbons--and spit out benzene and other substances.

But the explosion in shale gas production has given U.S. petrochemical firms a completely different kind of feedstock supply. Namely, lighter hydrocarbons like ethane--which is produced in abundance from wet gas plays like the Eagle Ford and the Marcellus.

Manufacturers have taken up this cheap supply as their go-to source. But there's one problem: processing of ethane doesn't yield significant volumes of by-product benzene. Meaning that U.S. production of the latter commodity has plummeted by as much as 45%. Below is a chart from Platts showing the notable drop in output.

That shortage is starting to give a big lift to profits for the fewer firms that still produce benzene. With margins on benzene sales having jumped to $47.76 per tonne last week--up from from just $7.14 at the end of June. A stunning 570% gain in a matter of days.

The red-line production forecast in the chart shows that the benzene shortage is likely here to stay. Perhaps signalling a powerful driver of profits for select companies in this esoteric business.

Here's to reforming the market,

By Dave Forest