Price and market trends: Europe naphtha oversupply persists despite outbound arb

25 January 2013 10:35  [Source: ICB]

Prospect of increased LPG exports from the US are weighing on European propane prices, as is lacklustre demand

The northwest European naphtha market remains oversupplied despite an open arbitrage to Asia, sources say.

A trader said: "Well these things never stay constant, so the overhang is being discounted enough to sell. But more material is replacing it, so NWE [northwest Europe] isn't really getting too much better."

These replacement volumes are said to originate from Russia and from local production.

While the arbitrage east remains open, with a relatively wide east-west February price spread of $18.50/tonne on 18 January, costly freight rates are a problem.

"It [the market] feels still a bit weak after some recovery," a trader said. "The arb is being worked, but freight is very expensive. Not sure if there are a lot of new fixtures."

Another trader said: "I agree with this... ships are getting scarce. It's supply and demand: ships are scarce so they charge more [for freight]."

The first trader said: "[It's] hard to gauge [the extent of the oversupply] ... hard to find decent demand at decent prices. I don't see fixtures from northwest Europe," the source added, referring to the open arbitrage but paucity of new bookings during recent days.

Furthermore, Europe's naphtha surplus is persisting despite significant volumes already having been booked for Asia earlier this month.

A producer said: "Ten to 12 LRs [long range vessels] have been booked so far in Jan. I have about a million tonnes moving east. That is quite a bit." The source confirmed that this quantity comprises material from both northwest Europe and the Mediterranean.

Shipping naphtha out of northwest Europe is particularly important at present, with ­petrochemical demand for naphtha still muted as a result of ongoing cheaper prices for rival feedstock propane.

Propane was priced $90/tonne below naphtha and such a spread is extremely unusual for this time of year, when propane values are usually driven upwards by demand for heat- ing fuel.

It is thought that the prospect of increased LPG exports from the US is weighing on European propane prices, as is lacklustre demand.

The propane-naphtha spread later narrowed to $55/tonne, but this still gave propane a clear advantage. The producer said: "They [petrochemical buyers] are definitely holding back - but stocks are fairly low. I think they don't want to give the optionality versus LPG up yet, so they are sitting on the fence for the time being."

Furthermore, petrochemical requirements are subdued despite healthy cracking margins.

"Hearing cracker runs in NWE are around 90% now," the producer said. "Petchem margins are really sensational here. But the Med is still struggling, and Lavera is down."

With Mediterranean refineries recently having cut runs as a result of poor margins, there was speculation about whether northwest Europe refineries might follow suit.

When asked whether this might happen, the trader replied: "I don't think so, the [refining] margins have really improved during the last four days."

Views are mixed regarding the outlook for the naphtha market.

"It [the northwest Europe market] is better now, but not out of danger," the trader said.

There are some glimmers of hope, however.

"There are less exports from India and the Mideast [to Asia]," the source added. "So we can ­actually send more [to Asia]. They should be okay to take a million tonnes per month for a couple of months."

The producer said: "It depends on how LPG behaves in the weeks to come, but the weather forecast looks promising for those who are long on LPG here."

By: Jo Pitches
+44 208 652 3214

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