Market Overview: This week, the market perceived an increased likelihood of easing tensions in the Middle East, leading to a decline in crude oil prices. However, news of benzene production cuts in May continued to gain traction. Benzene capacity utilization fell to its lowest level since February 2020, sustaining market expectations for price increases driven by anticipated supply-demand deficits in April, May, and June. Nevertheless, persistently high inventory levels across the benzene-styrene-3S chain, coupled with a consecutive two-week decline in downstream capacity utilization, are posing some resistance to further price rebounds.

I. Benzene Capacity Utilization Hits a 6-Year Low

This week, with maintenance at facilities such as Jilin Petrochemical's cracker, Jinling Petrochemical, and Zhuhai Changlian, benzene capacity utilization continued to drop to 67.85%, marking the lowest point since February 2020. Over time, the assessment that domestic benzene production from April to June will be significantly lower than previously expected has solidified. Production is now forecasted to be 110,000 tons below expectations in April, 200,000 tons below in May, and 90,000 tons below in June.

However, with the easing of Middle East tensions, market optimism about a production recovery is beginning to emerge. While the May production shortfall appears unavoidable, benzene production losses in June may be less severe than anticipated. This optimism stems from three factors: first, the easing Middle East situation and the subsequent drop in crude oil prices; second, the widespread market speculation (though not officially confirmed) about the possibility of Chinese oil tankers passing through the Strait; third, the widening price spread between toluene and benzene, which has made toluene-to-benzene conversion theoretically profitable. Reports suggest some dealkylation and disproportionation plants intend to start operations in May, which could alleviate benzene supply pressure in northern China.

II. Widening Toluene-Benzene Spread; Downstream Profits and Operating Rates Decline for Second Consecutive Week

Due to the drop in crude oil prices, the theoretical profit for benzene production via the reforming process (calculated using estimated naphtha and benzene settlement prices) rebounded from its bottom but remains significantly negative. However, as benzene is a by-product in the reforming process, gross margin is not the decisive factor for its capacity utilization.

In the toluene disproportionation sector, recent strong support for toluene prices came mainly from active procurement within the chemical industry, while demand from the oil products sector was very limited. This increased sales pressure for toluene producers, leading refineries to actively lower listed prices to reduce inventory. Toluene prices fell by nearly 1,000 yuan compared to last week. During the period, the toluene-benzene price spread widened rapidly, and the theoretical profit for disproportionation and dealkylation quickly turned from negative to positive. Driven by the return of profitability, operating rates for toluene-to-benzene processes increased in parts of Shandong and Jiangsu, leading to higher benzene production.

On the downstream side, weighted profits and capacity utilization have declined for two consecutive weeks. However, this week's drop in capacity utilization was still due to planned maintenance by enterprises. Major downstream sectors have not yet shown signs of production cuts due to reduced profitability.

III. High Inventory Across Benzene-Styrene-3S Chain Slows Price Rally

During the period, due to scarce vessel arrivals, benzene port inventories continued their destocking trend, expected to maintain a weekly drawdown of around 20,000 tons. However, due to high inventory levels at the beginning of the year, current benzene stockpiles remain at a five-year high. Beyond high benzene inventory, downstream styrene and its derivatives (ABS, EPS, PS) also hold elevated inventory levels. The combined inventory of the benzene-styrene-3S chain is currently higher than levels seen in the same periods from 2022 to 2025. High inventory levels across the entire chain and for individual products are bolstering market confidence in resisting higher benzene prices.

IV. Strong Fundamentals Already Priced In; Focus on Recent Middle East Negotiations

With the continued obstruction of Middle East crude oil exports, domestic refinery production cuts have gradually shifted from defensive, preemptive reductions to rigid cuts due to feedstock shortages. The trends of declining domestic production and import availability are becoming more certain. The theoretical monthly supply-demand deficit for domestic benzene from April to June is projected to reach -250,000 to -300,000 tons. However, this positive factor has already been repeatedly priced into the market. Furthermore, market sentiment is increasingly leaning towards an easing of Middle East tensions. Whether benzene prices can advance further from current levels will depend heavily on closely monitoring the progress of Middle East negotiations.