The alkylation oil market survives unscathed; can it reach new heights next year?

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In 2015, the production capacity of alkylation units in China grew at a rapid pace, with an average annual growth rate of 256%. The alkylation oil market has not yet seen strong demand, but it already has to confront the issue of overcapacity. In 2015, alkylated oils managed to survive, while in 2016 the market faced improvements in oil quality; crises and opportunities coexisted in that market. 1. Market conditions for alkylated oil in 2015 Figure 1: The domestic market for alkylated oil showed significant fluctuations in 2015. The lowest price at which alkylated oil was traded that year was around 4,500 yuan per ton at the beginning of the year, while the highest price was 7,000 yuan per ton in May; the maximum price difference between these levels was 2,500 yuan per ton. In the first half of the year, amid the volatile recovery of crude oil, the market for alkylated oils experienced even more pronounced fluctuations. In the second half of the year, the impact of crude oil factors diminished, and the alkylation oil market focused mainly on the basic supply and demand dynamics, resulting in modest adjustments within narrow ranges. Bull markets are not common; the first half of the year was generally positive. In the first half of 2015, the alkylated oil market performed fairly well. As crude oil prices began to recover, the market saw a rebound to 2,000 yuan per ton, with transaction prices reaching 6,500 yuan per ton. However, the report on the oil blending market by the Central 315 Gala quickly brought an end to the bullish trend in the alkylated oil market that had lasted for nearly two months. The oil adjustment market was sluggish, and there was a panic-driven drop in the price of alkylated oils; however, given the advantages of alkylated oils, the impact was not significant, and the market returned to an upward trend. In May 2015, the price of alkylated oil reached its highest level for that year, at around 7,000 yuan per ton. Kim Ju drove up market prices, to the detriment of manufacturers. Entering the second half of the year, alkylated oils entered a steep downward trend. At the end of August, the price of alkylated oil dropped below 5,000 yuan per ton once again, with the market remaining around 4,800 yuan per ton. However, the subsequent Kim Gu season provided a significant boost to the alkylated oil market. However, the upward trend in the market in September was driven, on the one hand, by a strong recovery in demand; on the other hand, domestic safety inspection agencies conducted thorough inspections in September, prompting most of the alkylation plants in China, especially those in Shandong Province, to shut down for inspection. This led to a sharp reduction in available resources, resulting in a severe shortage of alkylation oil and thus giving rise to the favorable market conditions during that month. In other words, in September, despite the favorable market conditions for alkylated oils, the situation did not improve as most manufacturers halted production. The market performance was poor in the fourth quarter, with no external forces available to boost it. The domestic alkylate market remained in a weak state for much of this period; after the peak performance seen in September, the price of alkylates failed to rise, and its price fluctuated between 4,800 yuan/ton and 5,600 yuan/ton throughout the fourth quarter. The fourth quarter represents a difficult period for alkylated oil; firstly, it is a off-season for gasoline demand, and with slow consumption at the end-use levels, the overall demand for alkylated oil enters a \"hard winter\" phase. Secondly, the operation of alkylation units was relatively stable in the fourth quarter, with an average domestic operating rate of 53.62%. Meanwhile, new alkylation units came online in the fourth quarter, adding a total annual production capacity of 320,000 tons. With weak demand for alkylated oils in the fourth quarter, there is significant pressure from the supply side. With pressures from both supply and demand on its own, the crude oil market remained weak, with prices falling to new lows for the year; WTI even dropped below $37 per barrel, failing to provide any support for the alkylation oil market. 2. Operation status of domestic alkylation units in 2015 Figure 2 Figure 2 shows that the profitability of domestic alkylation units was generally average in 2015; overall, their profitability in the first half of the year was lower than that in the second half. Profit losses were significant in the first quarter, with profitability only occurring for a few days in March, and the profit amounting to less than 100 yuan. The highest profit level for 2015 was recorded in September, with the daily profit reaching nearly 600 yuan per ton. Starting in late October, the profits of the alkylation units began to shrink significantly, and throughout November and December, these units operated at a loss for extended periods of time. At the worst times of losses, the alkylation unit incurred a loss of nearly 200 yuan per ton. Figure 3 shows that the operating rate of the alkylation units in 2015 was low from the start; it reached its lowest level in two years in February, with an average monthly operating rate of only 26.81%. With the recovery in crude oil prices, the operating rate of alkylation units increased. Starting from the second quarter, the average monthly operating rate of these units remained around 50%. In 2015, the average annual operating rate of the alkylation unit was 47.21%, a decrease of 13.93% compared to the previous year. Crude oil prices remain volatile at low levels, creating a poor atmosphere in the overall oil products market; demand for alkylated oils is moderate, which dampens the enthusiasm of alkylation manufacturers to operate. At the same time, the capacity of alkylation units is expanding rapidly, and the C4 feedstock after etherification has become another factor that limits the operating rate of these alkylation units. In 2015, the production of alkylated oils was 5.2838 million tons, representing a year-on-year increase of 41.07%. The increase in production is attributed, on the one hand, to the expansion of the capacity of alkylation units, and on the other hand, to the oil market driving demand for alkylated oils, thereby enhancing the capacity to absorb such oils. As the alkylation units continue to be expanded in the future, the production capacity of alkylated oils will maintain a strong growth trend. 3. Outlook for the alkylation oil market in 2016 Figure 4 As shown in Figure 4, Zhuochuang predicts that the annual production capacity of alkylation plants in China will reach 12.572 million tons in 2016, an increase of 1.2 million tons compared to the previous year, representing a growth rate of 10.55%. The period from 2016 to 2018 was still one of rapid expansion in the capacity of alkylation units; naturally, demand also increased alongside the upgrading of petroleum products. Therefore, the period from 2016 to 2018 was a critical time for the alkylation oil market. While prices of alkylation oil fluctuated based on market supply and demand, we need to pay close attention to the current attitude of the two major oil companies toward alkylation oil. At present, it is generally recognized that the two major oil companies have advantages in terms of alkylated products; against the backdrop of oil product upgrading, there will surely be a demand for alkylated oils on the part of these two companies. However, the main companies under Sinopec and CNPC are somewhat hesitant between using externally sourced alkylated oil or building their own alkylation plants. Of course, the use of externally sourced alkylated oils is undoubtedly a great benefit for the alkylated oil market, and the issue of overcapacity in the alkylated oil industry will also be alleviated in the future. However, under the current market conditions, if Sinopec and CNPC build their own alkylation units, this will increase the supply pressure of alkylated oil on the one hand, and reduce the supply of C4 hydrocarbons derived from ethers on the other. In other words, with the main manufacturers investing heavily in the construction of alkylation units, the future prospects for alkylation oil look bleak.