FocusEurope naphtha market strength likely to persist

31 January 2013 16:39  [Source: ICIS news]

LONDON (ICIS)--The recent period of unusually strong demand for European naphtha, and the resulting tight market conditions, are likely to persist for around two months, sources said on Thursday.

“My call is that this can last until the end of March,” a trader said. “In April/May, Middle Eastern and Asian refineries should come back from turnaround and a lot of gas should come from the US.”

Two other traders agreed that this exceptional period of high demand could indeed last several weeks.

This represents a significant change for the European naphtha market, which is structurally long and normally plagued by subdued requirements.

Tightness has arisen as a result of open arbitrages, both to Asia and the US, and healthy demand from the gasoline sector.

Furthermore, for many weeks – and very unusually for the winter – rival feedstock propane has been priced significantly below naphtha. This has rendered it the first choice for petrochemical buyers with the option to choose between feedstocks.

However, towards the end of the week, liquid petroleum gas (LPG) prices started to climb, reducing the price spread between propane and naphtha.

On Thursday, the February propane-naphtha price spread stood at around $60/tonne. Bearing in mind differences in yields, this is sufficient to make buyers consider naphtha.

“There’s lots of margin hedging and gas/nap buying [buying naphtha for gasoline blending],” a second trader said on Thursday. “Propane is getting out of the pool [less propane in the cracking pool], and [naphtha] arbs are still open to the east [Asia] and west [US].”

On Thursday, the east [Asia]-west  [northwest Europe] price spread stood at $14/tonne.

The source added that both the Mediterranean and northwest Europe markets are now tight.

A producer agreed: “Feb Med barrels have already cleared. The Med is very tight.”

Regarding the northwest Europe market, the source added: “I don’t think there is too much oil around to be honest. I struggle to find oil here.”

A third trader also spoke of tight conditions as a result of open arbitrages and robust demand.

“There’s strong buying from gasoline sector, arbs open east and west, and propane is now too expensive for petchem buyers. Gas/nap [the gasoline-naphtha price spread] is crazy, $120/tonne.”

Such a wide price spread should provide a clear incentive to purchase naphtha for gasoline blending.

Further bolsetering this notion, a gasoline broker confirmed that a gasoline arbitrage is open to the US, and that gasoline refining margins are at three-month highs.

A naphtha producer agreed: “Yes indeed, and we have sensational cold blending margins.”

By: Jo Pitches
+44 208 652 3214

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