Europe: Brent crude oil price hikes have driven European feedstock values upwards during the third quarter of 2012.
This has led to concerns about the detrimental effect that high prices are likely to have on demand, particularly for naphtha. Structurally long, the naphtha market has become increasingly dependent on arbitrage opportunities to Asia. While significant volumes were booked for the east early in the third quarter, opportunities to offload the European surplus now seem limited.
For many weeks, rival feedstock propane was priced significantly below naphtha, rendering the former the first choice for petrochemical buyers. However, early in the third quarter, the European propane market was tight as a result of reduced arbitrage opportunities into Europe, low stocks and the prospect of forthcoming maintenance at European refineries soon heading into a maintenance period. This drove propane prices upwards, narrowing the price spread between the two, and giving naphtha the advantage.
The US driving season was expected to boost demand for European gasoline, and blending components such as naphtha. However, gasoline requirements were less than in previous years, and the impact on the naphtha market was relatively modest.
A fire at Chevron’s refinery in Richmond, California, US, also raised the prospect of US gasoline shortages and increased requirements for European material. However, at the time of writing, little evidence of this had been seen.
However, Europe’s vacuum gasoil (VGO) market has seen demand from the US strengthen. Sources attributed this to the aforementioned refinery outage.
US: The market for refined products and West Texas Intermediate (WTI) crude has been volatile because of tensions caused by the uncertain European economy, concerns over Iran’s nuclear programme, and contradictory indicators on the speed of US economic growth.
The major factor affecting naphtha and Vacuum Gasoil (VGO) as refinery feedstocks has been the spread between WTI oil and Brent crude, along with Louisiana Light Sweet crude that has followed Brent higher.
The spread between crude grades is expected to narrow as the Seaway Pipeline has begun the flow of crude from the mid-continent to the US Gulf, but it will take time for oil prices to mesh.
Prices for natural gas liquids (NGL) have dropped, particularly for ethane and propane. Oversupplied mid-continent storage has caused an influx of product to the Gulf coast, and export opportunities are fully taken up.
A normal winter reduction of inventories could ease the supply glut and boost prices.
Updated to mid-November 2012