OUTLOOK ’12: Europe naphtha to stay bearish on poor demand

23 December 2011 15:25  [Source: ICIS news]

By Jo Pitches

LONDON (ICIS)--Soft demand stemming from a combination of high prices, fears for the economy and increased competition from other products is expected to keep European naphtha market activity levels subdued in 2012.

Following a difficult 2011, some believe business might decline even further in the coming months.

“No real change is expected for next year,” a buyer said. “There’ll be more [rival feedstock] LPG [liquefied petroleum gas] around, and demand for naphtha is likely to be as poor – or worse – than this year.”

An analyst said 2012 is likely to be a repetition of this year, or possibly worse. “There’ll be no real increase in demand – not from petchems, not from gasoline. The economy is not good.”

Elevated Brent crude oil prices have exerted upward pressure on naphtha values for much of this year. Front-month North Sea Brent figures in 2011 almost consistently remained over $100/bbl (€77/bbl) since 14 February, when political and civil unrest in North Africa, and subsequent fears for supplies, resulted in Brent trading at $103.04/bbl.

In April, further Brent price hikes drove naphtha values to 33-month highs, further damaging already-limited demand. On 28 April, the naphtha range was assessed at $1,096–1,104/tonne CIF (cost, insurance & freight) NWE (northwest Europe).

Naphtha values have softened significantly from the highs seen in April. By December, prices fluctuated at $850–900/tonne CIF NWE. Nevertheless, demand for naphtha has remained subdued, with some participants believing it is still too expensive.

“Asia can’t afford European naphtha,” a second analyst said, with regard to the arbitrage east having been shut for most of the second half of 2011.

“Asian cracker margins have been negative for a long time. Will things change? It’s difficult to say.”

While the consensus is that it is impossible to predict crude oil price movements, there currently appears to be little reason for Brent values to fall below $100/bbl as we enter 2012. Consequently, there is unlikely to be any significant drop in naphtha values just yet.

There can be little doubt that this year’s crude-driven naphtha price hikes would have been far greater, and demand likely further damaged, if not for the dampening effect of a negative naphtha crack spread.

The crack spread consistently remained in negative territory from January, falling as low as minus $14.80/bbl on 14 November.

With demand set to remain poor, most believe a weak spread is likely to persist into 2012.

“With the exception of any short-term supply issues, the crack is set to stay negative [next year],” the second analyst said.

Fears for the economy have also had a serious impact on demand for naphtha this year. This is demonstrated via the gasoline sector and the petrochemical industry.

Reduced requirements for gasoline itself have resulted in limited interest in European naphtha for gasoline blending. This is particularly evident in the US.

“The driving season in the US has been weak, [and] demand for gasoline is down this year,” an analyst said in October.

“It’s due to the poor economic outlook. Less trade means less commercial driving. Fewer people are taking holidays.”

While some participants speculate that the US economy might recover before Europe’s, a significant boost in US gasoline demand is not expected in 2012.

The economic crisis has also resulted in reduced petrochemical demand for feedstocks during 2011. The late summer and autumn saw European cracker run rates decreased as demand for end-products fell. By December, operating rates were as low as 70%.

“Petchems is underperforming. Demand for polymers is falling because of the recession,” a trader said.

When asked by ICIS whether crackers are likely to continue to run at reduced rates in 2012, a producer replied: “In the beginning, at least. Those margins are not looking too well.”

Petrochemical demand for naphtha also saw a negative impact this year from a prolonged preference for cheaper rival feedstock propane.

The usual late summer switch from propane to naphtha had still not occurred by the latter half of December. With mild weather having negated requirements for heating fuel, the propane market remains long, with prices staying below those of naphtha. This is expected to continue into 2012.

Some participants believe the propane surplus has been exacerbated by a structural change, with the Gulf in particular having ramped up LPG production during the last year or so.

“There has been more LPG out of the Gulf this year [because of] new developments. This will continue next year,” the producer said. “It’s not good for naphtha.”

Changes in the US refined product markets have also had an impact on European naphtha.

“The US has been exporting, rather than importing, propane this year,” the second analyst added. “This has challenged [European] naphtha.”

Furthermore, there are signs that US petrochemical requirements for naphtha might be reduced further in 2012 because of a growing preference for shale gas.

“Next year, the US will use even less naphtha in petchems because of shale gas,” the second analyst said. “It has an advantage over naphtha cracking in the US.”

Poor European refining margins for most products have seen refinery run rates reduced in 2011. With participants agreeing that Europe now has a structural oversupply of both naphtha and gasoline, reduced operating rates are likely to persist next year.

The consensus is that the condition of the European naphtha market in 2012 rests largely on the state of the economy and crude oil prices at the time. However, with no end in sight to the global economic crisis, the market is unlikely to witness any significant improvements in the foreseeable future.

“Expect a slow start to 2012,” the buyer said.

The producer added: “There’ll be less demand from Asia, but Europe will be trying to push heavy naphtha east, anyway.”

It is possible that prolonged negativity will change what is considered normal.

“Because of the recession, a negative crack spread and poor demand will become the norm,” the buyer added. “There’s simply too much naphtha in the world.”

Some participants remain a little more open-minded, however.

“What will happen in 2012? That’s a good question,” a trader said. “You hear all kinds of scenarios. LPG and Libya are not bullish factors. Low refinery runs are bullish. Petchem demand could pick up. But the mood is definitely more on the careful side.”

($1 = €0.77)

By: Jo Pitches
+44 208 652 3214

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