OUTLOOK '13: Europe naphtha market to stay bearish, oversupplied

21 December 2012 11:58  [Source: ICIS news]

By Jo Pitches

Naphtha crackerLONDON (ICIS)--The outlook for the European naphtha market remains bleak, with few if any changes expected for 2013.

A combination of adverse macroeconomic conditions, structural length and lacklustre requirements for the product are likely to continue to weigh on the market.

“Yes, I think it will be lots of the same as this year,” a producer said, referring to the consistently negative crack spread, frequent oversupply and subdued demand in 2012.

Naphtha pricing forecasts - largely dependent on crude oil values, which participants deem near-impossible to predict - are difficult. 

In terms of market conditions next year, with the European naphtha market structurally long and increasingly dependent on arbitrage opportunities to Asia, much will hinge on how the product performs in the east.

Arbitrage opportunities this year have been few and far between, particularly during the second half of 2012. 

“Well, Asia is a buyer of naphtha, it should step in,” a broker said. “But if the price levels don’t work … The east-west spread is currently negative [meaning that the arbitrage east is firmly closed for most grades].”

It is often the case that, with Europe’s oversupply building, volumes are sent to Asia even if it is not financially viable to do so.

“Naphtha will have to go there if Europe remains long,” a trader said. “I think it will be a bit more of a push compared to this year,” the source added, referring to the occasions when product is booked for Asia, even if at a financial loss.

This year has also seen rival feedstock propane become a greater threat to naphtha. Increased liquefied petroleum gas (LPG) supplies have resulted in propane often being priced below naphtha, rendering it the feedstock of choice for petrochemical buyers with the option to choose.

Propane values even fell below naphtha in mid-December, when LPG prices are traditionally higher as a result of heating fuel demand.

The situation looks set to be exacerbated in 2013.

“LPG will be longer [next year],” the broker said. “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 impact on prices is already clear.

“The forward curve for propane is way below naphtha for 2013 and 2014,” the broker said.

The trader said: “Well, there are only so many crackers that can switch to propane [rather than use naphtha]. But I agree the outlook looks bleak. The US has changed too much.”

The shale gas revolution in the US has significantly reduced US petrochemical requirements for naphtha.

Furthermore, the economic downturn has also impacted US demand for gasoline, which in turn has reduced requirements for blending components such as naphtha.

“US refinery rates are high, there’s lots of exports,” the broker said. “Naphtha demand for gasoline is lower because there’s not enough gasoline demand.”

The trader said: “Well it all [blending demand for naphtha] depends on the gas/nap [price] spread. But gasoline does not look strong either”.

In terms of general market performance, the buyer was a little more optimistic regarding the latter half of 2013, although the reasons for this are unclear.

“The first half of 2013 is likely to be similar to 2012: a negative crack [spread], the economy isn’t improving, crackers are running at reduced rates,” the source said. “The second half could be a bit better, though. I think people might be a bit more optimistic by then.”

A second trader said: “Well, the usual [January] restocking should happen, and big refinery turnarounds, should slow production … It [business] should pick up, but margins for the chems are poor, so maybe have to wait till Feb.”

A second buyer added that, in addition to economic concerns, other factors could come into effect in January. “There’s also ice water [sea ice disrupting shipping], winter storms and Russian season holidays beginning of 2013.”

Looking further ahead, some key factors - for example, the economic crisis, and crude oil values – are impossible to forecast.

“Beyond January?” a third trader said. “I've no clue.”

European naphtha prices began 2012 in the $920s/tonne CIF (cost, insurance and freight) NWE (northwest Europe), before very high crude oil prices drove them to a peak of the early $1,070s/tonne in March.

Mid-summer saw values drop significantly to the $720s/tonne on the back of softer crude oil before the naphtha range recovered to the $990s/tonne in September.

Prices held relatively stable for the remainder of the year, with the crack spread adjusting to balance crude oil price movements.

On the morning of 21 December, the naphtha cargo price range was assessed at $951-956/tonne CIF NWE.

By: Jo Pitches
+44 208 652 3214

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