After hitting record highs last May, benzene prices have since retreated, even though crude oil prices have zoomed to the highest levels in history. The reason: a lackluster U.S. demand for some of benzene's downstream products during late 2007, which kept benzene prices in check, even as oil rose.

The good news for buyers is that the same pattern should prevail this year and benzene prices will only take their temporary bump-up around mid-year, a seasonal trend related to the onset of the summer driving season.

The May 2007 spike, which saw prices for benzene leap to more than $4.20/gal, was caused by two factors, recalls Wilf Kimball, sales director at The Plaza Group, a Houston-based chemical distributor. "We were exporting a lot of styrene [from the U.S.] into Europe then," which boosted demand for the benzene needed to make the styrene. There were also some operating problems at refineries, which reduced world supplies of benzene.

But in the second half of 2007 styrene exports tailed off, Kimball says. And in view of new styrene capacity now coming online in the Middle East, those exports won't resume any time soon, he adds. Another benzene-derived product, phenol, will probably be in over-supply in the U.S. by the end of the first quarter, Kimball says, further reducing demand for benzene. As a result, he believes that benzene prices of $4.00/gal or more are not likely to recur in 2008, and instead will hover around $3.50/gal.

Benzene prices do tend to fluctuate on a seasonal basis, rising slightly just before the summer driving season, and 2008 is likely to be no exception. The main reason is that toluene, a benzene feedstock, is required as a gasoline blending agent for warm-weather driving. As seasonal demand for toluene increases, its price goes up, making benzene more costly as well.

Overall, buyers are seeing little flexibility on pricing. The run-up in crude oil has seriously eroded the margins of benzene suppliers, but the slow demand for styrene and polystyrene hasn't enabled the sellers to pass through their higher costs, according to an analysis of benzene markets by Tecnon OrbiChem. As a result, says the company, benzene suppliers are "adamant" about maintaining their existing margins.

While no one is expecting benzene to drop below the $3/gallon level this year, there are some emerging trends that should keep rates from breaking through the $4 barrier in the next few years.

Benzene prices seemed immune to the spurt in crude oil rates in late 2007 and will probably stay close to present levels through the end of 2008.

Lower demand for downstream benzene products such as styrene and cumene kept benzene prices in check

Benzene reserves will also be propped up over the next few years by a thriving worldwide demand for polypropylene, notes Simon Palmer, an aromatics analyst with Chemical Market Associates Inc. (CMAI) in Houston. This demand will cause petrochemical producers to build more ethylene crackers, which convert naphtha or gas oil into olefins such as ethylene and propylene. A byproduct of this conversion is pyrolysis gasoline (pygas), a rich source of benzene and other aromatics. So the polypropylene boom will "enhance the availability" of pygas, leading to more benzene on the market, says Palmer.

Also contributing to a buildup of benzene in the U.S., says Palmer, will be substantially lower exports of the chemical to Asia. That is because China is building huge new paraxylene complexes to supply its surging demand for polyester fiber, a downstream paraxylene product. Because benzene is a co-product of paraxylene production, Palmer notes, China will soon have vast new reserves of benzene, and less need to import it.

Lower demand for benzene in Asia, coupled with the other factors that will boost supplies, will probably cause U.S. producers to rationalize their aromatics capacity by closing less efficient units, says Palmer.

Lower exports will also mean less need for benzene imports. Benzene imports into North America at the moment are still substantial, amounting to about 1.5 million tons of the product in 2007, Palmer estimates. But imports of benzene may "literally dry up" between now and 2013, he says, as giant new refineries in the U.S. come on-stream. These complexes, which are intended to address a domestic shortfall of gasoline, heating oil and other hydrocarbon products, will also yield significant amounts of benzene and other aromatics as byproducts.

What will expanded domestic supplies of benzene mean for pricing? A lot depends on the cost of crude oil, says Palmer. "But as we expect energy prices to fall back over the next few years, so benzene prices will do the same." In Palmer's benzene scenario, "price spikes above $4/gal will be a thing of the past, at least for a few years, and underlying prices should spend more significant amounts of time below $3/gal."