Energy and feedstocks: naphtha prices continue to fall as oil decline persists

04 June 2012 00:00  [Source: ICB]

Near-term outlook bleak as China remains sluggish, with downstream markets softening

Asia naphtha prices continue to fall, hitting their lowest levels since mid-2011, undermined by a lack of buying interest as a result of subdued demand and downtrends in petrochemical prices.

The use of liquified petroleum gas (LPG) as a substitute to naphtha cracking continues to weigh on demand. Decreasing naphtha crack spreads, coupled with the recent sharp correction in regional olefins markets, led to several northeast Asia cracker operators to reduce their run rates. This exacerbated the already long supply situation, squeezing premiums on naphtha transactions.

The near-term outlook remains bleak as Asia's largest petrochemical sector, China, is still sluggish, with prices in major downstream markets still softening. Moreover, general macroeconomic conditions remain poor, on concerns about the eurozone debt crisis. Cracker operators based in both Northeast and Southeast Asia are in no hurry to procure spot material, in expectation of further price slides.

Despite European naphtha cargo prices falling to a 16-month low, demand remains poor, with limited opportunities to move material out of Europe. In ­economic terms, an arbitrage was open to Asia. However, the Asian naphtha market itself is weak and requirements are subdued.

For several weeks, an arbitrage to the US was expected to open, as the driving season increases demand for gasoline and hence blending components. However, it is believed to be open for only certain grades of naphtha - particularly heavy grades.

Demand from the petrochemical industry is again poor, with May purchases for downstream products such as ethylene and propylene pushed back to June on the expectation of lower monthly contract prices. With rival feedstock propane still priced significantly below naphtha, the former remains the first choice for petrochemical buyers.

Interest from the gasoline industry is again limited. Despite a wide price spread between gasoline and naphtha, demand was restricted to heavy grades of naphtha and some light ones.

US Gulf heavy naphtha discounts have strengthened, narrowing in on the price of Gulf coast spot gasoline, on stronger demand across the Gulf coast.

Additional reporting by Sheena Martin in Houston

Author: Sheau Ling Ong and Jo Pitches

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