04 October 2012 14:17 [Source: ICIS news]
LONDON (ICIS)--While refinery maintenance has rendered the European naphtha market balanced to tight, an oversupply is expected to build during the second half of October as arbitrages remain closed and European refineries come back online, several sources said this week.
“[Arbitrages] are closed again, so the market will lengthen from mid-month,” a trader said on Wednesday. “It's tight until then.”
On Thursday, the east-west price spread for November stood at $8/tonne (€6/tonne), rendering the arbitrage to Asia closed. While dependent on factors such as freight rates, a spread of $15-20/tonne is normally deemed necessary for an arbitrage to open to the east.
Furthermore, ICIS reported on Thursday that poor petrochemical demand in Asia could exert downward pressure on Asian naphtha prices.
This would likely further reduce opportunities to send European volumes east.
“I would say balanced to tight in the first half [of October], and long in the second half,” a second trader said on Wednesday, when asked what the outlook for the naphtha market might be. “The market is a bit tighter now [compared to last week]. But four crackers are currently down in Europe, and refineries will be coming back [after the maintenance period].”
On Thursday a producer said: “I agree that the first half [of October] will be tight, and it’ll be long in the second half.”
A buyer also agreed with this, adding that volumes have been moving from the Mediterranean to Asia, but that naphtha supply will soon increase. “Skikda [a refinery in Algeria] will be starting up, producing more naphtha in the Med.”
Meanwhile, most sources believe that petrochemical demand for naphtha remains lacklustre, with last week’s October price settlements for ethylene and propylene having had little impact on naphtha requirements.
“[The settlements] were lower but the euro is also stronger. Demand is not very present these days, and to be honest the naphtha market seems to be looking more at the gasoline picture rather than the petchem demand,” the second trader said. “Having said that, demand from petchems doesn’t seem strong from here.”
The buyer said: “There’s no real effect [of the etylene/propylene settlements] on petchem demand. [Petrochemical] buying is hand to mouth.” The producer agreed with this sentiment.
Furthermore, petrochemical demand for naphtha is said to be poor, despite climbing prices for rival feedstock propane rendering naphtha the first choice for petrochemical buyers.
On Thursday, November propane was priced $67/tonne above naphtha, giving the latter a clear advantage.
However, also on Thusrday a third trader disagreed that petrochemical demand is soft.
“It’s the best I have seen all year, I am selling at double digits,” the source said.
However, the views of this participant were at odds with those of others, with one source saying: “Where is the [market] length? I can’t buy a cargo.”
Sources agree that in addition to crude oil price movements, the gasoline market is currently the major driver of the naphtha crack spread and price backwardation.
On Wednesday afternoon, the price spread between premium gasoline and naphtha stood at around $145/tonne. In theory, this should provide a firm incentive to purchase naphtha for gasoline blending.
However, a stronger naphtha crack spread on Thursday morning – minus $5.90/bbl for November, compared with minus $6.45/bbl at 15.30 GMT on Wednesday – appears based on notional rather than physical demand for naphtha.
($1 = €0.78)
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