INSIGHT: Europe naphtha sector facing 'inevitable adjustment'

18 December 2013 15:22  [Source: ICIS news]

By Cuckoo James

LONDON (ICIS)--It is rare to gain an insider's perspective into the highly trader-driven European naphtha sector, but it is one sure way to picture what might be in store for the industry in 2014.

Swiss oil and products trading company Trafigura has released its annual report to the public, going beyond its inner circle of stakeholders and financial investors for the first time.

It says 2013 has been a “year of reappraisal in the commodity markets”. A great deal has changed and the firm is wary of the impact on the European naphtha sector.

Earlier this month, Trafigura was behind the nine-month high in northwest Europe naphtha prices. The company purchased a cargo from oil major BP on 3 December, sending naphtha prices soaring to $983/tonne CIF (cost, insurance and freight) NWE (northwest Europe) in the daily open market platform.

Connecting 2013 with the possible end of the commodities supercycle – the doubling of prices from the end of the 20th century to the beginning of the 2007 financial crisis – Trafigura said: “We see the developments of the past year as an inevitable adjustment in a market that has become overheated.”

Trafigura's crude oil desk fared better than its refined oil products desk in 2013, as the challenges in the crude markets were mainly limited to adjusting to shifting global trade flows as shale oil production took off in North America. "The crude trading desk had a successful year," the company said. 

By comparison, Trafigura's refined products desk had to deal with more drastic changes including the increasing impact of biofuel legislation in the US and a loss of traditional strongholds for the European naphtha and gasoline markets.

Europe is structurally long on naphtha, and sellers need to export to the US gasoline and Asian petrochemical sectors to keep stocks in balance.

Gasoline and diesel producers in the US have for sometime now been required to purchase Renewable Identification Numbers (RINs) to comply with US biofuels legislation, but a supply shortage of these certificates led to a spike in RINs prices earlier in 2013 which had a knock-on effect on gasoline prices.

A RIN number is a serial number assigned to a batch of biofuel to track its trading to ensure the US Renewable Fuel Standard is implemented according to the Energy Policy Act of 2005.

The volatile RINs market has prompted US refiners to move towards exports as it is much cheaper that way.

A rise in the value of mandatory blending component RINs in the US was the cause of much of the slowdown in demand in mid-year demand for European gasoline and naphtha, with US buyers having to cut back on gasoline imports.

An additional factor behind the drop in demand for European naphtha was a spike in shale gas production in the US.

"The US has traditionally imported naphtha for gasoline production and blending purposes. As shale gas prodcution has increased the US is now a naphtha exporter," Trafigura said.

US exports of naphtha are also being supported by a decline in demand for naphtha from the petrochemical sector as cheap ethane has replaced the feedstock at many US crackers.

"At least for now, the trend looks to continue," Trafigura said.

As a side note, exports from the US Gulf Coast have cost Europe another of its stronghold markets in the gasoline sector.

"[US] Gulf Coast refineries are now exporting cheap gasoline to West Africa," Trafigura said.

The rise in US naphtha exports has increased competition for the European naphtha sector in its other major export market, Asia.

But more importantly, the rise of "super-refineries" in Saudi Arabia and Asia could displace some of the European naphtha market share in Asia.

Europe currently exports an average of 700,000-800,000 tonnes of naphtha to the Asia-Pacific region. "Traditionally, Japan, Korea and Taiwan have been the main centres for petrochemical industry demand for naphtha. That began to change this year," Trafigura said.

Trafigura's shifting focus for 2014 is reflective of challenges faced by trading houses

FROM

TO

Shifting West African light crude to the US

Building storage capacity to export US products to other countries.

Traditonal European strongholds in Africa

Displaced by competitive oil products from the US Gulf Coast.

European refineries

Highly efficient super-refineries in Saudi Arabia, Asia.

Trafigura says it is focused on building the Texas Dock and Rail (TDR) oil products storage and export complex at Corpus Christi, Texas, US which would act as a principal export outlet of products from the Eagle Ford shale formation.

Increasing trading volumes is a priority for Trafigura

TRAFIGURA TRADING VOLUMES: OIL AND OIL PRODUCTS

Average daily volumes

2.4m bbls

Total annual volumes

118m tonnes

Change from 2012

Up 15%

Naphtha from Europe is likely to be challenged in 2014 not just in key export markets of the US and Asia, but also in the domestic petrochemical markets. This is because of the increasing profile among traders of the alternative cracker feedstock liquefied petroleum gas (LPG).

"The LPG desk grew extensively during the year under review. It traded more volume, shipped more tonnage and operated in more countries," Trafigura said.

LPG is increasingly becoming a "frontline commodity" as gas producers maximise its production by targeting wet gas reserves, it added.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog


By: Cuckoo James
+44 (0) 208 652 3214



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