Lead-in: Amidst the volatile Middle East situation and high international oil prices, the widespread production cuts at refineries in Europe and Asia continue to exert influence. Over time, the high toluene prices driven by supply tightening and cost pressures are gradually being transmitted downstream.

1. Significant Increase in Shandong Toluene Prices

Recently, international crude oil futures prices have been oscillating at high levels, with Brent crude fluctuating around $100 per barrel. In Shandong, refinery listed prices for toluene are in the range of 7,800-8,500 yuan/ton, with mainstream transaction prices around 7,800-8,000 yuan/ton. The Beijing-Tianjin-Hebei region is experiencing a severe toluene supply shortage. Within Shandong province, toluene consumption is primarily reflected in the TDI industry and cross-regional flows. Concurrently, reduced operating rates at toluene refinery units in Northeast China have led to lower supply, further increasing arbitrage flows to the Beijing-Tianjin-Hebei region. On the supply side, Yulong Petrochemical has resumed shipments. Mainstream producers are operating at stable rates, with no significant reductions observed yet.

Overall, despite shutdowns in some downstream sectors due to cost pressures, toluene producers are facing significant cost pressures themselves. Domestically, only Shandong has a relatively ample toluene supply. Some market participants expect the arbitrage window from Jiangsu to Shandong to remain steadily open in the near term.

2. Widening Spread Between Toluene and Benzene

This week, the average price spread between benzene and toluene in Shandong was 651 yuan/ton, with the HAD process showing a processing loss of -149 yuan/ton. Last week, the average benzene-toluene spread in Shandong was 275 yuan/ton, with an HDA processing loss of -493 yuan/ton. At the close on March 25th, the monitored HDA process loss was -737 yuan/ton, marking the largest single-day loss in nearly half a month.

Currently, with crude oil prices running high, aromatics production costs are well-supported, but downstream product prices are slow to follow. Furthermore, due to instability in crude oil supply for production refineries, companies are prioritizing securing oil for production. Additionally, losses from toluene-to-benzene conversion have become normalized. The recent restart of an HDA unit in Shandong has increased toluene consumption.

3. Toluene-Xylene Spread Remains Stable

During the week, the average price spread between xylene and toluene in Shandong was 39 yuan/ton, with the average toluene refinery production-to-sales ratio at 76%. Last week, the average xylene-toluene spread in Shandong was 1.8 yuan/ton, with the average toluene refinery production-to-sales ratio at 57.4%. Although PX prices fluctuated widely during the week, the PX-MX spread still covered the break-even point. Moreover, due to a significant drop in contracted MX volumes for PX plants in Northeast China in April, purchases from Shandong are expected to increase. However, the narrowing spread between xylene and toluene is putting pressure on toluene's application in oil blending.

The toluene-xylene spread fluctuates influenced by xylene's supply-demand structure. However, as the PX-MX spread remains at a high level and is unlikely to narrow significantly in the short term, the toluene-xylene spread is expected to remain stable.

4. Market Outlook

Positive Factors: Geopolitical conflicts are pushing oil prices higher. Simultaneously, reduced arrivals of domestic crude oil and naphtha are leading to tightening toluene supply, with widespread production cuts among manufacturers.

Negative Factors: Weak terminal demand with slow follow-through.

Currently, the Middle East situation remains fraught with uncertainty, but the probability of sharp short-term fluctuations in international oil prices has decreased. Consequently, the domestic toluene market's focus has shifted from oil prices to domestic supply and demand fundamentals. Due to domestic crude oil supply shortages and high subsequent refining costs for refineries, the willingness to proactively lower prices is very limited at present, indicating strong cost-side support. On the downstream side, although toluene's downstream fine chemical industries are maintaining profits, overall operating rates across these sectors are low, and they are in a phase of forcibly passing on high raw material costs. In summary, tightening supply and cost-side support are the key factors determining the direction of toluene price movements. Toluene is expected to trade strongly in the short term, with an estimated range of 7,700-8,300 yuan/ton for the coming week.