30 August 2013 09:40 [Source: ICB]
A spate of refinery shutdowns for maintenance are expected to cause the market to tighten in September
There are high hopes the current bullish sentiment in the European naphtha cargo market will extend into September on the prospect of tightening supply, industry sources said. A spate of refinery maintenance shutdowns due from September onwards is expected to tighten supply in the naphtha market.
The September naphtha crack spread - usually a good indication of market sentiment - has consequently strengthened to one of the highest levels this year. The crack spread is the price difference between crude oil and naphtha, calculated in US dollars per barrel. However, trades dwindled on crude oil-driven price hikes in the week ended 23 August.
"Well, there is a decent turnaround programme on European refineries in September and October - in addition, the refinery margins are really low now, so people are expecting some additional run cuts as well," a naphtha trader said.
The majority of the refinery shutdowns are in the Mediterranean, North Africa and Russia, which are key sources of European naphtha.
In addition, Algerian state-owned energy group Sonatrach plans to shut the condensate splitter unit at its 335,000 bbl/day Skikda refinery for maintenance. The shutdown is expected to last one month from mid-September. "The Skikda splitter will be down one month from mid-September," a second naphtha trader said.
The condensate splitter mainly produces naphtha. A third naphtha trader estimated Sonatrach exports around 200,000 tonnes/month of naphtha from the site.
Meanwhile, crude oil-driven naphtha price hikes have kept the arbitrage window from northwest Europe to Asia closed for the third week in a row, limiting naphtha exports.
"[Crack is strong] due to refinery run cuts and [the] Skikda turnaround. Otherwise demand is poor and arbs are closed," said a fourth naphtha trader.
The first trader said the current high crack spread is unlikely to increase further in the short term. "I think we have priced a lot of the bullishness in right now," it said.
Although the crack might remain stable for September, naphtha prices could fluctuate based on upstream ICE Brent crude oil futures, sources added.
Exports to Asia are limited to regular volumes shipped from the Mediterranean, while US naphtha requirements for gasoline blending remain minimal. "I am struggling to explain the strength in the naphtha market," the second trader said.
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