30 August 2012 13:36 [Source: ICIS news]
By Jo Pitches
LONDON (ICIS)--Despite hopes of increased demand for European naphtha, the physical market is weak and lengthening, sources said on Thursday.
Most agreed the outlook was gloomy, with some believing prices needed to soften to prevent further damage to demand.
While the September naphtha crack spread strengthened to minus $4.80/bbl this morning, from minus $7/bbl a week earlier - bolstered by hopes of increased demand from both Asia and the US - this did not reflect the physical state of the market, participants said.
“The disconnection between [the] physical [market] and the paper [market] is just getting wider and wider,” a trader said. “The paper is being supported by some bull players...”
When asked whether the picture for European naphtha was bleak, a second trader said: “True. On paper, it’s strong. Physical, it’s weak here in Europe.”
“[The strong crack spread] is all on sentiment, not reality,” the first trader added. “Europe is long of barrels. There is no buying interest and no arbs open. You can buy in Europe at a flat premium or a discount, but then the backwardation and cracks are strong on any opportunity.
"First it was the hurricane Isaac [boosting hopes for increased demand as a result of reduced US supplies] and the fire at the largest Venezuela refinery, but [despite this] no naphtha went to the Americas.”
Asia’s naphtha price backwardation is likely to surge as a result of a tight supply.
“Now it is a tight Asia [leading to hopes of demand for European volumes],” the first source continued. “But the east-west spread is still at plus $3/tonne for September, whilst we need to be between plus $15/tonne and plus $20/tonne to make the arb work.”
The trader continued: “If they [Asia] want more nap from Europe, they will have to be even stronger than Europe, which is printing a backwardation of $19/tonne on September/October, and very strong cracks to open the arb. Or the Europe curve will ease off, or the Asian one will go by the roof. My view is that Asia will only need barrels in October.”
While market participants eagerly await the olefin monthly contract price settlements, naphtha demand from the petrochemical industry remains limited, despite prices for rival feedstock propane softening from last week.
The first trader said: “Propane has been coming off. Pro/nap [the propane-naphtha price spread] is now down to minus $6/tonne versus plus $20/tonne last week. But generally speaking the petchems [demand] is not there. The European economy is looking worse every time.”
A third trader said: “They [the petrochemical industry] remain quiet indeed ... propane is ticking down a bit, but is still very quiet indeed.”
“They would need that just to keep small margins and reflect the [naphtha] flat price increase from $850/tonne to $960/tonne so far this month,” the first trader added.
Despite a wide price spread between gasoline and naphtha, which in theory should be sufficient to encourage the purchase of naphtha for gasoline blending, demand is limited.
“Gas-nap is very strong, with Sep at plus $120/tonne,” the first trader said. "But physically... Again, the blending pool is not pulling much (if any) nap barrels.”
When asked whether European naphtha prices need to soften in order to combat damage to demand, the first trader said: “Europe will have to come down in September, mainly and firstly to reflect the physical picture.”
The second trader said: “Depends, maybe some players have an appetite in the window…”
The third trader said: “Fundamentals, yes. But not sure if people will allow it to go down. Gasoline [prices] is very strong as well, so cracks moved up with gasoline. One should expect [prices to come down] but [prices] keeps getting supported.”
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