16 August 2012 14:19 [Source: ICIS news]
By Jo Pitches
“The problem is crude,” a trader said. “Who would have thought that crude would go from $90/bbl to $116/bbl in less than two months? I believe cracks have to come down. They are far too strong.”
A broker said: “Brent is up massively, and along with it the crack, so it’s starting to cost quite a bit of margin.”
At around 10.00 GMT, the September naphtha crack spread stood at minus $7.40/bbl. September Brent was at $116.35/bbl, and the naphtha range was assessed at $949–951/tonne CIF (cost, insurance & freight) NWE (northwest Europe).
On 15 June, the July crack spread was at minus $13.25/bbl, August Brent at $97.51/bbl and the naphtha range assessed at $743–751/tonne CIF NWE.
The trader warned of the possible consequences if naphtha values continue to climb: “Such a high flat price will probably kill any little petchems demand. It could incentivise them to import their ethylene from the east rather than producing it in Europe.”
The broker added: “It will surely have an effect on runs. September ethylene and propylene price setting will tell us more.”
Talk of the naphtha market appearing reasonably healthy at present has kept the crack spread at relatively high levels.
Petrochemical buyers are opting for naphtha over rival feedstock propane, as LPG prices rise, narrowing the spread between the two. Gasoline demand from West Africa is said to have picked up, and with it, demand for blending components such as naphtha. There is also speculation that last week’s fire at a Chevron refinery on the west coast of the US could result in gasoline shortages there, and hence increase demand for European gasoline.
However, the justification for the relatively strong crack spread appears questionable.
The trader said: “I completely disagree [with the naphtha market appearing relatively robust]. There are about 150,000 tonnes unsold in the Med, and in NWE, all existing grades are available.”
Furthermore, there is a clear difference between sentiment in the 'paper' market and in the physical market.
The broker said: “Physical nap isn't that strong, gasoline demand is OK in the US, but the gas-nap spread has narrowed significantly [meaning there is less of an incentive to purchase naphtha for gasoline blending]. There is still plenty of supply.”
“Bids from petchems are coming at a discount to a small premium,” the trader added. “Gasoline demand is just talk for the time being. No real buying is taking place. “Europe is only strong because of the window and paper activities,” the source continued. “Not because of the physical picture, which seems more long than balanced.”
Furthermore, while Asia is expected to receive 500,000-700,000 tonnes of naphtha from northwest Europe and the Mediterranean in August and September, opportunities to send further volumes east appear slim.
A producer said: “The arb to Asia is closed. The east-west spread has been pushed down by $3/tonne this morning to around $7/tonne. This could indicate they [Asia] don’t need more.”
“The arb to the east is fully closed now with the east-west spread at $6.75/tonne, versus $19/tonne two weeks ago,” the trader said.
While dependent on factors such as freight rates, an east-west price spread of around $15/tonne is generally thought to be the level at which arbitrage opportunities start to become possible.
Worse still, reverse arbitrages could see volumes head to Europe, exacerbating the oversupply.
“If this window and paper pull keeps going on, barrels from the Caribbean and the Red Sea will come to Europe,” the trader concluded.
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