Europe naphtha market split over exceptional gain in crack spread

09 August 2013 20:28  [Source: ICIS news]

LONDON (ICIS)--The European naphtha crack spread has strengthened to one of the highest levels seen this year despite low exports to the key Asian and US markets, and mostly over the possibility of a shift in fundamentals in the near future, industry sources said on Friday.

The September naphtha crack spread strengthened from minus $8.00/bbl on Monday evening to minus $6.70/bbl late on Friday.

The strength of the crack spread has come as a surprise to many in the naphtha market.

A few traders attributed it to an anticipated fall in supply as a result of production issues expected at the Skikda refinery in Algeria in mid-September and potential refinery cutbacks in the Mediterranean as a result of poor margins for refiners in the region.

The production outage at the Skikda refinery could not be confirmed.

In addition, domestic petrochemical demand is higher than a few weeks ago and is supporting the crack, traders said.

Nevertheless, the perceived tightness in the future could be offset by slower export demand, a few traders said.

"The market is less well offered than it was at the front on the physical, but I still don't see much in the way of buying at all," a naphtha trader said.

Adding to the less bullish factors, a trader said production problems at Skikda would mean that more, and not less, materially would become available since the naphtha used internally within the refinery would be freed up as a result of the production disruption.

A further proof of a possible weakening in the September naphtha market came from a petrochemical buyer that said: "[Petrochemicals] have increased their runs since June steadily. What helped is in July we cracked less LPG. We are obviously not at full rates. In September, we hope to crack more LPG. The propane - naphtha spread was $50/tonne last week. If you look at the forward curve it looks like $100/tonne now for September. Naphtha demand is going to decline in September."

Meanwhile, a spate of cracker turnarounds planned for September should reduce demand from the petrochemical sector, sources said.

A second naphtha trader said: "Our reading is it should balance out between the refinery turnarounds and the steam cracker turnarounds coming up in September".

A crack spread is the price difference between crude oil and naphtha, calculated in US dollars per barrel.

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By: Cuckoo James
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