29 November 2012 18:47 [Source: ICB]
Naphtha market participants agree that the outlook for the European naphtha market is bearish
The European naphtha market is likely to lengthen further, and prices soften as a result of a weakening crack spread, sources said.
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.
In late November, 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 petrochemicals. We'll likely see more length unless arbitrages open."
With the December refining margin at minus $6.50/bbl, 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 naphtha 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."
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. 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]."
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