22 November 2012 13:08 [Source: ICIS news]
By Jo Pitches
LONDON (ICIS)--The European naphtha market is likely to lengthen further, and prices soften as a result of a weakening crack spread, sources said this week.
Refining margins are heading deeper into negative territory as already-lacklustre demand declines further as the year draws to a close, and arbitrages out of northwest Europe remain shut for most grades of naphtha.
On Thursday morning, when the December crack spread stood at minus $7.40/bbl, a producer said: “Yes, refining margins are worse, it [the naphtha crack spread] might come down more. There’s no buying from petchems [pertrochemicals]. We’ll likely see more length unless arbs [arbitrages] open.”
With the December refining margin at minus $6.50/bbl on Wednesday morning, a trader said: “Petchems and gasoline [demand from these sectors] have disappeared for a while. It [the weakening spread] is just a natural correction that should have taken place a few weeks ago.”
“Europe has currently the most expensive nap in the world, which is ridiculous,” the source added. “In June we were in contango and cracks hit minus $16/bbl, so to be down to minus $6.50/bbl and to have a weakening backwardation is the minimum we should expect really.”
The trader also believes that the naphtha refining margin needs to soften further as business in December is likely to be worse than in June.
When asked whether demand from both the petrochemical industry and the gasoline sector have likely subsided until the New Year, the trader said: “My call is until January, yes.”
Highlighting the need for what is deemed an overdue correction, the trader added: “Naphtha was far too strong in terms of cracks, spreads and premiums anyway. Let’s not forget that the macroeconomics are not looking great in Europe. Governments are increasing taxes, consumers are spending less.”
Also on Wednesday a second trader said: “Yes, demand is fading a bit. It feels a bit of a correction [in terms of the crack spread weakening] is due.”
On the same day, a third trader said: “There is a small distortion in the market as one player holds most of the current length and we do not know what they'll do with it. But besides that, I agree with the fact that the market is overdone on the backwardation for sure and on cracks. It depends as well on refining margins [for other products].”
With the European market structurally long, it has become increasingly dependent on arbitrage opportunities to Asia.
However, with a narrow east-west price spread, the arbitrage from northwest Europe to the east has remained closed for open spec naphtha for several weeks.
On Wednesday morning, the east-west spread stood at $4.50/tonne (€3.51/tonne) for December prices. By Thursday morning, this had widened to $6/tonne. However, a spread of $15-20/tonne is usually deemed necessary for an arbitrage to open to Asia.
Furthermore, with ICIS having reported on Thursday that Asian prices for open spec naphtha are also likely to fall as a result of increasing supplies and persistently poor demand from the petrochemical sector, it is expected that prices in the two regions could move in tandem rather than the price spread widen.
Of further concern is the fact that, with significant volumes from other regions already having been booked for Asia – paraffinic naphtha from the Mediterranean, and heavy naphtha from the US – how much more the east can absorb is questionable.
“[The arbitrage to Asia is] slightly open from the Med for [long] term contracts,” the first trader said on Wednesday.
“But having sent more than a million tonnes this month from the Med [Mediterranean], and with talk of Vitol sending one or two LR2s [long range vessels] from NWE [northwest Europe], losing at least $20/tonne [as arbitrage economics are not favourable], the east can’t absorb all that, and is showing very little appetite for more western barrels. Asia won’t take much in December.”
At present, perhaps the most likely prospect of shortening the European naphtha oversupply is by refineries cutting runs. With usually-profitable fuel oil refining margins currently very weak, this is a possibility.
However, the first trader does not see this as an inevitable solution.
“Mediterranean refineries are running hard, the Med will go very long next month. So even if refineries are trimmed in NWE due to weakening margins, the north will get all the Med barrels. So supply will be there, but no demand due to year-end destocking.”
The producer disagreed with this on Thursday, believing that Mediterranean refineries rather than northwest Europe ones will be impacted first.
Overall, participants agree that the outlook for the European naphtha market is bearish.
($1 = €0.78)
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