Europe naphtha hits fresh 6.5 year low as global growth fears persist

Cuckoo James

26-Aug-2015

The Dow Jones Industrial Average closed at 16,459.75, down 530.94 points or 3.12%. (source:Rex Features)LONDON (ICIS)–European naphtha prices have hit a fresh six and a half year low as the global stock market rout persists despite China’s move to cut interest rates on Tuesday, market sources and analysts said on Wednesday.

“I think, oil prices are likely to end the day in red. Due to the lack of any positive news, present increases are unlikely to last,” Ehsan Ul-Haq, a senior oil market consultant at KBC Energy Economics said.

Europe arbitrages around 1m tonnes of naphtha to the Asian petrochemical sector every month, and traders remain concerned the bearish stock market sentiment will lead to cuts in cracker run rates across Asia on fears over slowing demand, despite the high cracker margins.

On Tuesday, the  US stock markets gave away most of the gains made during the day as the initial reaction to China’s interest rate cuts wore off, ending the day in red.

The Dow Jones Industrial Average lost 204.91 points to close at 15,666.44, down by 1.29%, while the Standard & Poor’s 500 index finished the day 1.35% down to 1,867.62, after an early-day rebound.

Stock markets in the Asia-Pacific region traced a similar path on Wednesday, after a roller-coaster trading day.

On Wednesday, the highly-volatile Shanghai Composite Index hit an eight-month low, closing down by 1.3%, shrugging off the move by the People’s Bank of China to lower the one-year lending rate by 25 basis points to 4.6% on Tuesday, effective from 26 August.

Northwest European naphtha cargoes traded at $351-352/tonne cost insurance freight (CIF) northwest Europe (NWE) late on Tuesday afternoon in the open market platform after ICE Brent crude oil futures gave away most of the gains made during the day, in line with similar movements in the global stock markets.

On Monday, naphtha prices moved down by a sharp $29/tonne after ICE Brent crude oil futures plummeted to the lowest level since the first quarter of 2009 after the ‘Black Monday’ nosedive in Asia-Pacific stock indices.

A naphtha trader said: “Naphtha has collapsed. [The stock market crash] is making a big impact at the moment. Seems China has stepped back their ethylene and propylene buying and so a bit of panic has set in.”

Europe is dependent on Asian naphtha demand for use as a petrochemical feedstock to balance its regional oversupply. A second naphtha trader said on monthly trade flow between the two regions: “One million metric tonnes [of naphtha] goes from the Mediterranean to Asia.”

A third naphtha trader said they are closely watching the Asian petrochemical landscape to see if producers might be rushing to cut cracker run rates, despite the high margins in the region.

A fourth naphtha trader said: “[The stock market crash could lead to] lower demand for plastics in China [and could lead to a] slowdown of crackers but does not seem we are quite there yet.”

ICE Brent crude oil futures continue to be under downward pressure with the backlash from the stock market crash along with on going concerns on oversupply.

“I don’t think that we’re going to see Brent find a bounce anytime soon. If China continues to fade, demand can’t lean on the EU and the US hasn’t shown any signs of slowing production,” said Carl Larry, director of oil and gas business development at Frost & Sullivan.

“So anyone producing crude and looking for buyers are going to have a tough time,” Larry said.

“Oil oversupply remains a problem with both Angola and Nigeria showing the highest October exports in several months. North Sea loading numbers in September are exceptionally high in spite of a long-term decline in the region,” Ul-Haq said.

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