Feedstocks: Switch to LPG and propane hits demand for naphtha

07 May 2012 00:00  [Source: ICB]

European market is bearish, with demand for gasoline and petrochemicals tailing off

Asian naphtha prices have continued to decline in recent weeks amid low demand from cracker operators and high inventory levels in Japan. Petrochemical cracker operators have switched to using competitively priced liquefied petroleum gas (LPG) as a petrochemical cracker feedstock in place of naphtha. Further downward pressure was generated by the prolonged shutdown ofSouth Korean GS Caltex's full-range naphtha splitter in Yeosu.

Attempts by market participants to move western naphtha cargoes into Asia in June, due to slow demand in the eurozone region, could add further downward pressure to prices in Asia.

The European naphtha cargo market has become more bearish, with demand for gasoline and petrochemicals tailing off. A steep backwardation discouraged buying for storage. Despite poor demand, refinery turnarounds helped keep the northwest Europe market balanced.

While the arbitrage to Asia is closed it should be viable to send certain grades east. Despite the forthcoming driving season, the arbitrage to the US remains closed because of weakened demand for gasoline, and hence for blending.

Petrochemical demand for naphtha remains very limited as the price spread between rival feedstock propane and naphtha widened further, providing a clear incentive for petrochemical buyers to opt for LPG instead of naphtha wherever possible.

ExxonMobil and BP have been significant buyers for the Gulf coast. Both are purchasers of heavy naphtha; their crude units do not produce enough naphtha to run their reformers at capacity.

Ramping up production of alkylate has been a sign of optimism that demand for gasoline will pick up during the summer and more gasoline will be needed. This optimism has spread.

Crude prices are firm but stable, albeit off the highs seen in the first quarter of 2012. Concerns over demand due to the eurozone debt crisis and signs of slowing growth in China and the US are countered by possible disruption to supplies when sanctions against Iran come into force on July 1.

Additional reporting by James Dennis in Singapore and Tony Dillon in London

Author: Tony Dillon and James Dennis

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