Energy and feedstocks: naphtha rises as demand improves in Asia and US

16 July 2012 00:00  [Source: ICB]

US interest in gasoline and naphtha is increasing as a result of the driving season

Asia spot naphtha prices firmed on active buying for August delivery by South Korean and Southeast Asia cracker operators. Fewer supplies from Europe in August lifted sentiment further.

However, most market participants are not confident that prices will sustain the upward trend, given the relatively unchanged weak fundamental demand. In addition, the steep increase in naphtha prices is a concern as the prices of downstream petrochemical products are not firming at the same rate, which may eventually weigh on margins.

Middle East supplies remain abundant, as a result of unsold term volumes. Interest in European naphtha picked up, while the backwardated market exerted pressure to sell on those who had built stocks.

Despite this increase in activity, the market is long at the front, as volumes booked during a ­recent reverse arbitrage started to arrive into Europe from Latin America and the US.

While the arbitrage to Asia remains open in economic terms, participants have not noticed any vessels booked for the East. Despite a recent strengthening of the Asia market, petrochemical demand there remains weak.

US demand for gasoline has risen as a result of the driving season. Consequently, demand for naphtha for blending purposes provides some support to the European market. However, it is unclear for how long this will last.

Demand from the petrochemical sector remains poor, with rival feedstock LPG still priced significantly below naphtha. US Gulf naphtha discounts to spot gasoline remain weak from low demand in a quiet market.

Following the US Independence Day holiday, buying interest for naphtha has increased slightly and demand for US Gulf naphtha is expected to rebound soon. Demand was boosted by a USEnergy Information Administration report on gasoline, which showed consumption has risen to just over 9m bbl/day.

This confirms market sentiment for rising gasoline prices, and signals higher demand for gasoline blendstocks, such as naphtha.

The downward trend on crude prices was halted by the threat of a total shutdown of Norwegian production due to a strike, but this was resolved by last minute government intervention.

Additional reporting by Anna Matherne in Houston and Tony Dillon in London

Author: Samuel Wong and Jo PItches

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