Corrected: OUTLOOK ’10: Mideast naphtha capacity casts shadow over Europe

24 December 2009 11:00  [Source: ICIS news]

Correction: In the ICIS news story headlined “OUTLOOK ’10: Mideast naphtha capacity casts shadow over Europe" dated 24 December 2009, in the second paragraph … After a disastrous fourth quarter in 2008, traders were in a severely pessimistic mood for 2009… instead of …After a disastrous fourth quarter in 2009, traders were in a severely pessimistic mood for 2010… A corrected story follows.

By Alex Davis

LONDON (ICIS news)--The European naphtha market has a healthy immediate future, but the expected new capacity from the Middle East casts threatening clouds over the coming decade, traders and analysts said.

After a disastrous fourth quarter in 2008, traders were in a severely pessimistic mood for 2009.

“It’s difficult to see any positives. Some say that what’s just happened is just a little taster for next year,” one trader said in early December.

However, it seemed no one predicted that China’s rapacious demand for oil, refined products and petrochemicals would continue almost unabated as the rest of the world struggled.

The main effect has been that although Europe’s naphtha demand never reached beyond low-to-stable levels, arbitrage opportunities in the east provided an outlet and pushed prices well above most participants’ expectations.

“[The year] 2009 has not been as bad as we thought it would be. In fact, the first half of 2010 doesn’t look too bad either,” said one trader.

“Chinese demand has been the major factor, and that looks set to continue,” the trader added.

Arbitrage interest into Singapore during the second half of 2009 helped naphtha prices rise to $709-711/tonne CIF (cost, insurance, freight) NWE (northwest Europe) in December, as assessed by global chemical market intelligence service ICIS pricing.

Prices had been languishing at around €350/tonne CIF NWE at the start of 2009.

Significantly, by the end of the year, naphtha had actually become more expensive than gasoline, unusually pricing the product out of gasoline blenders’ considerations.

The front-month cracking margin turned intermittently positive from September onward, hitting a high of $1.40/bbl over crude oil on 9 December. This was the first time that the cracking margin for naphtha had been positive in almost two years.

In its last monthly oil report of 2009, the International Energy Agency (IEA) reported demand for naphtha in China rose from 763,000 bbl/day in 2008 to 902,000 bbl/day in 2009. This has been forecast to rise again in 2010 to 957,000 bbl/day.

In comparison, naphtha demand in OECD Europe, which fell from 1.06m bbl/day in 2008 to 980,000 bbl/day in 2009, has been forecast to show little change in 2010.

The Asian demand was driven mainly by plastics needed in the car industry. China’s new car sales rocketed from 9m in 2008 to an expected 12m to 13 m in 2009, and should reach 16m by 2015, according to research group JD Power.

Europe’s car industry does not seem to be able to provide the same level of demand.

“[Europe] car sales are expected to be flat in 2010. We don’t expect the car industry to pick up, so we expect things to be steady in Europe. We will see some demand, and it will be slow,” said one trader.

Consequently, with Europe arguably having been overreliant on China as an outlet for excess naphtha, the worry that was outlined in the previous outlook that new Middle East refining capacity would hinder arbitrage opportunities still lingers.

“I definitely agree that new Middle East capacity is a cloud on the horizon for naphtha. For 2010, I think production runs will be low as the gasoil/diesel overhang will persist and this will limit naphtha production,” said a leading industry analyst.

“Our forecast is that naphtha will be a little bit stronger versus Brent next year, but no great change,” they added.

Market players, however, said they did not view the Middle East as an immediate threat. Several projects in the region have been delayed due to financing difficulties, such as the Yanbu and Al-Jubail refineries in Saudi Arabia.

“I am more and more confident that the new capacity will not be an issue just yet. There are delayed projects, and if Iran keeps its material for itself, I don’t think the arbitrage into Asia will be hit too much yet,” said a trader. 

To discuss issues facing the chemical industry visit ICIS connect

By: Alex Davis
+44 20 8652 3214

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