Weakening Europe naphtha crack spread defies robust market

29 January 2013 12:26  [Source: ICIS news]

Repsol cracker at Sines, Portugal (Source: Repsol)LONDON (ICIS)--A softening of the European naphtha crack spread makes little sense considering stronger market fundamentals, market participants said on Tuesday morning.

At 10.45 GMT, the February naphtha refining margin stood at minus $7.50/bbl, compared with minus $6.70/bbl at 16.30 GMT on 28 January.

“It’s [the reason for the softer crack spread] a bit unclear,” a trader said. “Gasoline [prices] moved up big time yesterday.”

Higher gasoline prices, resulting in a wider gasoline-naphtha price spread, raise the incentive to purchase naphtha for blending. In turn, this should see a firming of the naphtha refining margin rather than a weakening.

In response to the suggestion that the softer naphtha crack spread makes little sense, the trader said: “I know. That is what I thought yesterday as well, that the crack would jump when gasoline jumped. But it did not.”

“I can confirm both infos,” a second trader said in response to the weaker refining margin, and the movement appearing to defy logic. “[There are] no fundamentals behind it. Feb gas/nap [the February gasoline-naphtha price spread] is at plus $103/tonne (€74/tonne), and Feb pro/nap [the February propane-naphtha price spread] is recovering to minus $73/tonne.”

While prices for rival feedstock propane remain significantly below naphtha, rendering the former the first choice for petrochemical buyers, a slight recovery of liquefied petroleum gas (LPG) values and a narrowing of the propane-naphtha spread should result in a strengthening naphtha refining margin.

Further supporting the idea of a stronger crack spread is a wide-open arbitrage to Asia. On Tuesday morning, the east-west price spread was at $17.50/tonne. While dependent on factors such as freight rates, a spread of $15-20/tonne is usually deemed necessary to make sending volumes east financially worthwhile.

Finally, crude oil values have remained relatively stable from 16.30 GMT on Monday, also offering no explanation for the weaker naphtha crack spread. March Brent crude oil is hovering just over $113/bbl.

Struggling for an explanation for the weaker crack spread, the first trader said: “It’s [the gasoline price jump] now correcting a bit, maybe naphtha is moving down with that a little.”

The second trader agreed that in terms of fundamentals, the market is looking stronger than last week, yet the crack spread is weaker.

“It [the weaker crack spread] can only be coming from the bear players winning the battle,” the source said.

($1 = €0.74)

By: Jo Pitches
+44 208 652 3214

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