European petchems could be tempted to overproduce

By John Richardson

EUROPEAN refiners are “awash with naphtha” as a result of long-term structural length and a lack of arbitrage, a petrochemicals feedstock purchasing manager told the blog yesterday.

The decline in US gasoline demand (according to most experts consumption in the States peaked in December 2007 and has been falling ever since) has left European refiners long on both gasoline and therefore naphtha for several years now.

At the same time the European refiners are under pressure to maximise production to meet strong local diesel demand!

What has added to these long-standing pressures in the last few weeks is closure of naphtha arbitrage to Asia due to the upcoming cracker turnaround season, added our source.

“Brazilian arbitrage is also shut because that market has been well-supplied from elsewhere,” he said.

This could, in theory therefore, create an opportunity for European cracker operators to squeeze some heavy discounts out of the refiners.

The high cost of Brent crude, though, which is trading at a big premium to West Texas Intermediate, is underpinning the price of naphtha in Europe.

The scenarios one can describe include cheap naphtha supplies that tempt European cracker operators to overproduce.

Our fellow blogger Paul Hodges believes that the biggest factor behind tight European petrochemicals markets over the last 18 months has been lack of feedstock from the refiners.

Or will refiners cut runs as crack spreads get squeezed?

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