FocusEurope naphtha market oversupply set to continue

14 December 2012 13:41  [Source: ICIS news]

Naphtha crackerLONDON (ICIS)--The European naphtha market continues to face growing oversupply and a lack of opportunities to relieve high stock pressure as demand remains muted and outbound arbitrages closed, sources said this week.

Furthermore, there appear to be few changes expected in the coming weeks. “Europe is still not showing any demand from petchems or blenders,” a trader said on Thursday.

A second trader agreed that Europe’s oversupply is building, as requirements for the product remain lacklustre. The source added that there is currently nothing supporting the physical market.

On Friday a broker said: “There are weak cracker [run] rates, refineries have returned from maintenance [increasing supplies], gasoline is weak [reducing the incentive to purchase naphtha for blending]. The [naphtha] market is fundamentally weak.”

Exacerbating the paucity of demand for naphtha is this week’s steep fall in prices for rival feedstock liquefied petroleum gas (LPG).

Propane was priced significantly above naphtha for several weeks, rendering naphtha the feedstock of choice for petrochemical buyers. By the end of last week, propane stood $100/tonne (€76/tonne) above naphtha.

This change is therefore unwelcome news for the oversupplied naphtha market.

“[Propane] collapsed this week,” the first trader said on Thursday. “The whole curve [propane-naphtha spread for forward months] is now negative.”

The second trader added: “The main change this week is propane weakening, putting additional pressure on the [naphtha] market.”

“Propane and butane have come right down,” the broker said on Friday – when January propane prices were $30/tonne below those of naphtha, and January butane at 95% the price of naphtha.

A propane price drop is very rare at this time of year, when cold weather increases demand for heating fuel and drives values upwards.

“It is all on the east,” the first trader explained on Thursday. “It is a change in the Chinese tax regime, taxing the raffinate C4 import, which means that butane local production will increase next year in China. It is not finalised yet, but the noise of it was enough to take propane down, and then naphtha is so strong that [the propane-naphtha spread] has came down massively.”

On Friday, the broker added: “It’s [lower LPG prices] due to weakness in the east. Demand is weak. The Middle East can’t sell to Asia, so [propane] cargoes are coming to Europe.”

Adding to the naphtha oversupply, arbitrage opportunities to Asia and the US remain limited.

The first trader said on Thursday: “Early in the week, the arbitrage was open to the east for a day or two, but it is now closed.”

On Thursday morning the east-west spread stood at $3/tonne for January prices. By Friday morning, the spread was flat.

Depending on factors such as freight rates, a spread of $15-20/tonne is normally deemed necessary for an arbitrage to Asia to become economically viable.

The consensus is that little change in market fundamentals is expected going into 2013, although there should be some restocking in January.

($1 = €0.76)

By: Jo Pitches
+44 208 652 3214

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