Escalating tensions in the Middle East have once again heightened concerns over crude oil supply and shipping security. Recent developments surrounding Saudi Arabia, Iran, the United States, and the Strait of Hormuz have increased uncertainty in the international energy market.

The Strait of Hormuz is particularly important to global energy supply, as more than 20% of the world's oil and petroleum products pass through the waterway. Any disruption to navigation could directly affect crude oil prices and, in turn, the broader petrochemical market.

For the hydro-refined benzene market, the transmission from crude oil to benzene prices is relatively clear. Higher crude oil prices push up naphtha costs, increasing the production cost of petroleum-based benzene and supporting pure benzene prices. However, hydro-refined benzene faces additional cost pressure because its key feedstock, crude benzene, has also risen sharply amid geopolitical uncertainty.

In September, mainstream crude benzene transaction prices in East China climbed to RMB 8,300–8,440/tonne, exceeding the upper end of the historical five-year range.

1. Hydro-refined Benzene Margins Turn Negative

The sharp increase in feedstock costs has significantly squeezed hydro-refined benzene producers' margins.

During the first half of the year, the industry remained profitable for a period. Average profits for hydro-refined benzene producers in Shandong reached RMB 231/tonne at one point, while the operating rate rose to 67.81%.

However, market conditions changed considerably in September. According to the latest data, hydro-refined benzene margins in Shandong have fallen to around -RMB 83/tonne, indicating that producers have once again entered loss-making territory.

The deterioration in profitability is increasing pressure on plant operations. Although the domestic operating rate of benzene hydrogenation units increased by 1.82% month-on-month to 59.42% on September 17, the increase was mainly attributable to the restart of units following maintenance rather than an improvement in overall industry profitability.

With losses widening, some hydro-refined benzene producers are considering reducing operating rates or suspending production, strengthening expectations of a contraction in market supply.

2. Refinery Operating Rates Decline Amid Feedstock Concerns

Feedstock availability is also becoming an increasingly important factor for the market.

Disruptions and uncertainty surrounding shipping through the Strait of Hormuz have delayed crude oil and naphtha arrivals at some refineries. Several refineries have therefore started reducing operating rates this week.

As of September 17, the capacity utilization rate of atmospheric and vacuum distillation units at major domestic refineries stood at 73.22%, down 0.68 percentage point month-on-month and 8.3% year-on-year.

Maintenance at refineries in North China and Anqing Petrochemical has also contributed to the decline in operating rates.

Against this backdrop, expectations of tighter pure benzene supply in October are increasing. This could once again enhance the market's focus on hydro-refined benzene as an alternative source of benzene supply.

3. East China Pure Benzene Inventories Fall to a Five-Year Low

Low inventories are currently providing additional support to the benzene market.

East China port inventories of pure benzene have fallen to approximately 38,000 tonnes, the lowest level for the same period in nearly five years.

Inventory growth has been significantly slower than previously expected. Several factors have contributed to the situation, including:

• Lower-than-expected growth in petroleum-based benzene supply
• Relatively low operating rates of hydro-refined benzene units
• Feedstock shortages at South Korean refineries
• Reduced exports of benzene to China

As a result, the September import forecast for pure benzene has been revised downward to approximately 370,000 tonnes.

The low inventory level indicates relatively tight spot availability, supporting pure benzene basis spreads and providing a degree of cost and price support for hydro-refined benzene.

4. Middle East Developments Remain a Key Market Driver

In the short term, the hydro-refined benzene market is likely to remain highly sensitive to developments in the Middle East, with crude oil prices serving as a key variable.

Although there have been some signs of easing tensions, which could potentially lead to a modest correction in domestic hydro-refined benzene prices from recent highs, uncertainty remains.

The market continues to monitor the possibility of renewed disruptions to oil transportation through the Strait of Hormuz. Any deterioration in the regional situation could quickly affect crude oil prices, feedstock costs and downstream benzene pricing.

At the same time, demand-side conditions remain an important variable. The extent to which high benzene prices can be supported by downstream demand will influence the sustainability of the current market strength.

5. Supply and Inventory Trends to Remain in Focus

Overall, the hydro-refined benzene market is currently facing a combination of high feedstock costs, negative production margins, declining refinery operating rates and low pure benzene inventories.

While the market could experience some price correction if geopolitical tensions ease and crude oil prices retreat, the potential for supply-side contraction may provide underlying support.

Going forward, market participants should closely monitor:

• Crude oil price movements
• Crude benzene feedstock prices
• Hydro-refined benzene operating rates
• Domestic refinery utilization
• East China pure benzene port inventories
• China's benzene import volumes
• Shipping conditions through the Strait of Hormuz
• Further developments in the Middle East

The interaction between feedstock costs, supply availability and geopolitical risks will remain crucial in determining the direction of the hydro-refined benzene market.