By Cuckoo James
LONDON (ICIS)--The European naphtha cargo market may have seen very few trades over the past few days, but there are high hopes the current bullish sentiment will extend into September on the prospect of tightening supply, industry sources said this week.
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.
However, trades have dwindled on crude oil-driven price hikes, as those opting to purchase cargoes have to spend more money.
“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 added 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.
“The problem is that the arb to the East is closing now and we really don't see much demand from gasoline,” the first naphtha trader said.
In the domestic markets, naphtha demand from the unexpectedly strong petrochemical sector has been hit to a significant extent by weakening prices in the liquefied petroleum gas (LPG) market.
A number of European crackers are able to switch between naphtha and LPG, depending on pricing. The September naphtha-propane price spread is around $100/tonne for the third week in a row, increasing the pull towards the cheaper feedstock LPG.
A petrochemical buyer said it would revert to cracking more propane in September and the preference for naphtha in July is likely to dwindle.
A crack spread is the price difference between crude oil and naphtha, calculated in US dollars per barrel.
($1 = €0.75)
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