29 November 2012 13:12 [Source: ICIS news]
By Jo Pitches
LONDON (ICIS)--The outlook for the European naphtha market is still gloomy with an oversupply set to build and little opportunity to offload it, sources said this week.
Furthermore, the recent strengthening of the December crack spread is in stark contrast to the bearish physical conditions of the market.
A week ago, most participants welcomed a softening crack spread and backwardation, believing it was an overdue correction needed to better reflect the oversupplied physical market.
Many players are unable to account for this week’s return to a stronger refining margin.
On Thursday morning, the December crack spread had strengthened to minus $5.10/bbl.
“It’s [the firmer crack spread] coming from a stronger gasoline blending demand rather than cracking demand, but it does seem a bit overdone,” a trader said on Thursday.
A second trader said he agreed when asked about the firmer refining margin making little sense to many participants.
On Wednesday morning, when the crack spread stood at minus $5.55/bbl, a third trader said: “There are no fundamental reasons behind it. It is all speculation and money on the table, nothing else.”
On the same day, a broker also said he could not account for the strengthening of the refining margin.
With the European naphtha market structurally long, it is highly dependent on arbitrage opportunities to Asia.
However, the east-west price spread has remained narrow during recent weeks.
With Asian naphtha demand currently limited, arbitrage opportunities to the east remain few and far between for most grades of naphtha.
“Yeah, the east doesn’t look too strong anymore”, the first trader said on Thursday, when the east-west spread for December values stood at $4.50/tonne, and for prices in the first quarter of 2013, $6.50/tonne.
An east-west spread of $15-20/tonne is usually deemed necessary for an arbitrage to open to Asia.
Furthermore, with over 1m tonnes having recently been booked for the east – from both the Mediterranean and the US – how much more naphtha the region can absorb is questionable.
Reflecting this, some participants have heard of a major Asian petrochemical company trying to delay inbound shipments until January as they already hold sufficient volumes.
On Wednesday the first trader added: “Hearing they [Asia] have too much coming their way.”
Recently, with refining margins for a number of products poor, there has been talk of refinery run cuts taking place in the near future. This would help curb the naphtha oversupply.
However, on Wednesday the third trader said: “So far [there are] no trims taking place, so if cracks are back up, there shouldn’t be any [run cuts].”
By Thursday, with the gasoline market looking slightly stronger, run cuts seems even less likely.
“I think they [refiners] will be too worried about gasoil shortages if they do [cut runs] into winter,” the first trader said on Thursday.
Gasoil is used as heating fuel.
Meanwhile, with the year-end looming, participants throughout the chain are keen to run down stocks. Petrochemical demand is poor, and gasoline blending requirements, while slightly improved, are not sufficient to eat into Europe’s naphtha oversupply.
“Yes, there’s some WAF [West African] demand in the past two weeks,” the second trader said on Thursday. “But it does not compensate for the slowing down of petchem purchases, so the market is getting longer and longer in the ARA [Amsterdam-Rotterdam-Antwerp].”
The first trader on Thursday said that some northwest Europe volumes could head to the US for gasoline blending.
However, the second trader elaborated that only a small quantity of very light naphtha could go there, “…not the big bulk of full range [naphtha], of which Europe is long.”
Overall, the consensus is that the outlook for the market is still bleak.
“I fully agree,” the trader said on Wednesday. “Fundamentally this market doesn’t look good. Very few people want to own barrels in December. Players have a lot of cargoes to offer now."
“I see December as very poor,” the source added, “but some restocking [will be] taking place in January.”
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