Transatlantic-Asia buying helps tighten Europe naphtha

Focus article by Cuckoo James

LONDON (ICIS)–The European naphtha market is tighter on certain grades following a pick up in transatlantic and Asian demand, and good petrochemical utilisation in Europe, industry sources said this week.

In Europe, the Mediterranean is tight with more demand than supply but in the north “light virgin naphtha” (LVN) remains long. However, “There is no open spec naphtha on offer, only in the window,” a trader said.

The market is tight on these grades after months of supply length brought on by slow demand from one or more of its four-pronged downstream industries: European and Asian petrochemical production and US and west African gasoline blending.

Now demand seems to be picking up from all sides as gasoline blenders seek more naphtha from Europe, even as naphtha demand swells from the petrochemical sectors in both Europe and Asia.

In addition, there is demand for European naphtha from non-traditional outlets in Latin America.

European petrochemical demand is up as consumers are less inclined to switch to the alternative and cheaper feedstock propane as the price spread between the two products continues to be narrower than in December.

February propane-naphtha price spread has narrowed substantially from $145-146/tonne in early December to the $60s/tonne in January.

Propane has become more expensive because of heating demand from Asia and following its use as fuel to run refineries in Europe. “Propane is strong because of cold weather everywhere and especially a strong demand for propane in the east,” the trader said.

A propane trader said on Friday 23 January: “We have seen some big increases, the refineries are using propane instead of natural gas to make the steam, propane was cheaper than natural gas. Stock levels are now low as a result and that’s pushing the price up.”

In general, steam crackers in Europe are set up to switch only 25% of their production to propane. Nevertheless, there is a huge variation as newer crackers often have more flexibility in switching between the feedstocks, while older crackers are often unable to crack propane.

Meanwhile, demand for European naphtha from across the pond has shot up. Latin American countries are buying European naphtha because of tighter supply from up north in the US.

“There is good demand in Brazil, Venezuela due to less imports available from the US Gulf [where there is] tight supply. Demand in Colombia is also good for the same reasons,” the trader said.

Moreover, the publication of the weekly US Energy Information Administration (EIA) showed an unexpected draw in US gasoline stocks last week, raising expectations of a rise in demand for blend stock naphtha from the country.

“Gasoline stocks were down 2.587m versus 0.320m build expected,” the trader said.

This has shifted attention back to the US gasoline markets after a period of intense focus on Nigeria. West African gasoline blending demand has been high in January after Nigeria issued its first-quarter allocations.

Good Chinese petrochemical demand is also propping up European naphtha sales.

The east-west price spread was relatively stable at $27.50/tonne week on week for February cargoes. However, the arbitrage to Asia is open as the cash differentials in Asia have strengthened.

“Not much change [in the east-west price spread], but the diffs in Asia are stronger so the arb is a little wider,” a second trader said.

“All arb tonnes have been pointing there now so come March there will seriously [be] much product out there. So in that respect it will be slightly easier to balance Europe in February,” a third trader added.

The naphtha forward curve is in backwardation up until March-April because of the tighter supply. However, the curve slips into a contango from there on.

Additional reporting by Stefan Naidu