20 December 2012 13:49 [Source: ICIS news]
By Jo Pitches
LONDON (ICIS)--The outlook remains gloomy for the European naphtha market due to ongoing subdued demand and a continued dearth of opportunities to offload surplus product, sources said this week.
A trader said on Thursday: “Arbs are closed, the market is the same as last week. No arbs, no demand...”
On Wednesday, a broker said: naphtha was "fundamentally weak".
A softening of the January crack spread to minus $3.60/bbl on Thursday morning was welcomed by some, who consider it a better reflection of the bearish, oversupplied, physical market.
The comparatively robust refining margins earlier in the week were deemed inappropriate by many participants. The January refining margin reached minus $2.80/bbl on Monday afternoon.
When asked the reason for the softer margin, the trader said on Thursday: “Can’t really say. It [the market] is so overvalued that it could just be a natural correction.”
A second trader said: “It feels like the flat price move yesterday may have stretched the economics a bit too far for end users. I started to see selling last night at $945/tonne and above from Eastern counterparties.”
Regarding the movement of the refining margin, the source continued: “It depends if the crack [spread] reflects the physical cargo [market] length - or where it will price out in the window.”
A third trader added: “It’s [the softer crack spread] due to weakness in the east, so a bit of natural weakness. Gasoline is strong, so it isn’t that. Propane is weak too. But I think it’s just technical rather than fundamental.”
The first trader argued that the east is not weak and that Europe is overvalued.
Nevertheless, outbound arbitrages remain firmly closed, with participants not having noticed any volumes booked for the east or west this week.
On Thursday morning, the east-west price spread stood at minus $3.50/tonne. A spread of $15-20/tonne is often deemed necessary for an arbitrage to open to Asia.
The second trader said: “With Jan E/W [the January east-west price spread] trading negative, it’s not pretty.”
Furthermore, last week’s drop of prices for rival feedstock LPG continues to render propane the first choice for petrochemical buyers with the ability to choose between naphtha and LPG.
A fall of propane prices is extremely rare during winter, when demand for heating fuel normally exerts upwards pressure on values.
Some attribute the propane price drop to fundamental changes expected next year.
“LPG will be longer [next year],” a broker said on Wednesday. “There’ll be a big expansion of US export capacity from February. The Middle East has been ramping up [production], there’s more [LPG] coming from West Africa… From Angola there’ll be an extra half a million to a million tonnes [of propane].”
The effect on prices is already clear.
“The forward curve for propane is way below naphtha for 2013 and 2014,” the broker said.
However, on Thursday, the first trader said: “More shale gas production is expected and the Chinese will import less [next year], but that was known and priced in a long time ago in Q2 and Q3 2013 [LPG prices]. It [LPG values] is coming down now because of a warm winter so far, no demand in the east and a strong bear play by a few players.”
On Thursday morning, the price spread between propane and naphtha stood at minus $24/tonne for January prices and minus $50/tonne for February.
Two weeks earlier, propane was priced around $100/tonne above naphtha.
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