21 November 2013 12:05 [Source: ICIS news]
By Cuckoo James
LONDON (ICIS)--Prospects look bright for the European naphtha market, with robust Asian demand absorbing much of the European oversupply and domestic petrochemical demand expected to rise along with increasing propane values, sources said this week.
The European naphtha differential over ICE Brent crude oil futures, or the crack spread, consequently hit a yearly record high of minus $3.70/bbl on 20 November, with trading activity riding on the heavy optimism generated by the shift in fundamentals from a bearish autumn to a bullish winter.
Following closed outbound arbitrages and an increasing European surplus during autumn 2013, an arbitrage east has now remained open for 2-3 weeks.
Europe has booked a minimum of 1,484,000 tonnes of naphtha to the Asia-Pacific region in a span of just two weeks, a sharp increase from the regular average volume of 700,000-800,000 tonnes exported per month, ICIS shipping data revealed.
The arbitrage to Asia, although deemed "a bit overdone" has continued to be open this week and helped sustain the bullish sentiment, naphtha sources maintain. "The [Asian] arb has been worked and is working [though] you lose money," a naphtha trader said.
Adding to the optimism, European naphtha prices have fallen below the usually cheaper alternative petrochemical feedstock propane for the first time this year, as propane prices continued to surge on tightening supply, leaving European petrochemical producers with the option to purchase naphtha without compromising on their margins.
A number of European petrochemical producers are able to switch between naphtha and propane, which is a liquefied petroleum gas (LPG). The feedstocks are used to produce ethylene, propylene and other widely-used petrochemicals in Europe. "LPG [is] rather expensive," the naphtha trader said.
On 19 November, northwest European naphtha was trading at $920.50/tonne CIF (cost, insurance & freight) NWE (northwest Europe) at one point during the day, while propane cargoes were selling higher at $930/tonne CIF NWE.
A second naphtha trader said: "There's been a switch in the economics. People are moving back to naphtha." The northwest European naphtha market had lost more petrochemical buyers to the LPG sector in autumn, as the price spread between the two feedstocks had remained close to three digits for the most part.
Meanwhile, naphtha prices have been trading in a choppy manner in spite of the robust market, moving in line with fluctuations in upstream ICE Brent crude oil futures.
Naphtha prices stood at an average of $914/tonne CIF NWE on 1 November before declining steadily to a monthly low of $892/tonne on 7 November. Prices moved steadily back up again to hit a monthly high of $944/tonne on 14 November.
Nevertheless, naphtha gave back some of its pricing gains over the next few days, dropping as low as $920/tonne on 15 November, before posting gains of over $10/tonne to hit $931/tonne on 20 November.
Northwest European naphtha is used as a blendstock in gasoline stocks exported to the US, and as a petrochemical feedstock in Asia and Europe.
($1 = €0.75)
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