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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Chemical Supply Squeeze Imminent As Refiners Prioritize Gasoline

  • The cost of key chemicals used in pharmaceuticals, rubber, and plastics are on the rise.
  • Refiners have been prioritizing gasoline over chemicals as demand continues to rise. 
  • In addition, crude to chemicals producers, especially in Europe, are feeling unprecedented cost increases due to the sky-high natural gas prices. 

Costs of chemicals used in making key goods, including pharmaceuticals, rubber, and plastics, are soaring as the rally in crude oil prices this year pushed up the price of petrochemical feedstocks. But higher oil prices are not the only reason for record-high prices of benzene, toluene, and xylene. 

Record-high gasoline prices and strong gasoline demand globally as consumption rebounded after the COVID-induced slump prompted refiners to prioritize gasoline production over chemicals production. The jump in gasoline refinery utilization amid robust gasoline demand has squeezed the global supply of the key chemicals for manufacturing essential goods, raising costs for producers of such goods and adding to already very high inflation.  

Refiners Intensify Competition For Key Chemicals

Refiners have ramped up gasoline production as demand recovers this year, and refining margins are at multi-year highs. Despite a drop in margins in recent weeks and weakening demand—likely reflecting price sensitivity to higher gasoline prices—crack spreads remain elevated amid low global petroleum inventories heading into a period of seasonally high demand, the Energy Information Administration (EIA) said in its July Short-Term Energy Outlook (STEO) earlier this week. The crack spreads are well above historical averages due to low inventories both in the U.S. and globally, fuel demand rising to near pre-pandemic levels, and lower product exports from Russia.

Moreover, refining capacity, especially in developed economies, has dropped since early 2020 as refiners closed down plants permanently after COVID. 

In the United States, operable capacity across refineries is now 17.944 million barrels per day (bpd), down by 1 million bpd compared to 18.976 million bpd two years ago. Several refineries have either shut down or started preparations to produce biofuels since the pandemic crashed fuel demand and posed uncertainty about the long-term business case for refiners. 

So when road fuel demand started rebounding at the end of last year and this year, refiners globally had fewer gasoline-making units at their disposal. Inventories started falling below the historical average, contributing to a fuel supply crunch that sent refining margins well above recent norms. 

Refiners responded to sky-high margins with a rise in production. 

As a result of strong demand from refiners, prices of raw materials used in the manufacturing of consumer goods and pharmaceuticals have skyrocketed. 

Record-High Prices of Key Chemicals 

The price of benzene, whose derivatives are used in making pharmaceuticals, rubber, and plastics, soared to a record-high in Rotterdam in June, before falling in early July, according to data from Independent Commodity Intelligence Services (ICIS) cited by the Financial Times

In the middle of June, U.S. spot benzene prices reached the highest on record, ICIS said.

“Prices rose in response to ongoing supply tightness as high octane/low Reid Vapour Pressure (RVP) gasoline blendstocks remain in short supply, causing most reformate to be diverted to the gasoline pool and limiting operating rates at aromatics extraction units,” wrote Zachary Moore, Deputy Managing Editor, Americas, at ICIS.  

Toluene, used in textiles and plastics packaging, has also seen strong demand from the gasoline pool in recent months, Moore noted.  

Due to high gasoline prices and margins, gasoline producers are also using a rarely seen high volume of higher-value chemical feedstocks, further sapping the availability of those products for consumer and pharmaceutical goods manufacturing, analysts say.

“It’s like using cream instead of milk to blend into your coffee,” ICIS’s Zubair Adam told FT.

Petrochemical Prices Set To Ease

Analysts and manufacturers say we may have seen a peak in chemicals prices. 

“We’ve reached the peak and looking at a soft landing in terms of pricing,” Mike Boswell, CEO at UK distributor Plastribution, told FT. 

With more and more signs emerging of a dent in consumer confidence globally, demand for consumer goods could slow down in the second half of the year as many consumers are feeling the pinch of the highest inflation in four decades, with energy and food costs for households soaring. 


Earlier this week, the U.S. Bureau of Labor Statistics announced consumer prices for June 2022, saying that over the last 12 months, the all items index jumped by 9.1 percent—the fastest consumer price increase over a one-year period since November 1981.

Despite an expected drop in consumer demand, manufacturers of various goods could continue to feel the upward cost pressures of the past few months if the chemicals supply continues to remain tight.

In addition, crude to chemicals producers, especially in Europe, are feeling unprecedented cost increases due to the sky-high natural gas prices, as gas is used in the process. 

“Refining, chemical, fertiliser and industrial companies have largely been able to pass on higher natural gas prices through product prices, but they may find it more challenging to increase prices further without causing reducing demand,” Fitch Ratings said in a non-rating action commentary this week, noting that “high gas prices propel growing headwinds for European companies.”    

By Tsvetana Paraskova for Oilprice.com

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