Global naphtha demand falls on ‘faltering petrochemicals’, LPG cost advantage - IEA

Author: Jonathan Lopez


LONDON (ICIS)--Global demand for naphtha has fallen sharply on the back of a squeeze in petrochemical margins as crude oil prices rose, with a cost advantage from the competitor feedstock liquefied petroleum gas (LPG), the International Energy Agency (IEA) said on Wednesday.

The IEA’s July Oil Market Report showed a sharp fall in demand for naphtha in March, down 480,000 tonnes/day, compared with February, and down by 370,000 tonnes/day compared with March 2021.

On average, the Paris-based agency forecasts demand for naphtha is to fall in 2022 by 220,000 tonnes/day on average.

“Long a pillar of oil demand growth, naphtha use is faltering. Following 18 consecutive months of annual gains, naphtha demand fell sharply in March,” said the IEA.

“This change in trajectory reflects a squeeze in petrochemical profitability, inter-feedstock competition, the impact of Russia’s international isolation and China’s lockdowns.”

The fall in naphtha demand in 2022 comes after years of growth, buoyed by the “seemingly inexorable expansion” of the petrochemical sector globally.

In fact, naphtha LPG and its feedstock, ethane, were the only major products for which use expanded during 2020 and 2021, said the IEA, with naphtha demand standing 8% by the end of 2021, compared with 2019 levels.

“However, naphtha demand plummeted by 1.1m bbl/day (14.2% of total demand and more than double the typical seasonal fall) between January and May 2022,” said the IEA.

“The unusual conjunction of high crude oil prices and this weaker demand has seen naphtha crack spreads collapse to historically low levels.”

Asian olefins producers’ margins have borne the brunt of a combination of elevated feedstock prices due to crude oil increases as well as subdued downstream demand on the back of China’s strict lockdowns in the second quarter to contain the pandemic.

Asia accounts for an “overwhelming and growing” share of global naphtha consumption, at 71% in the first quarter of this year.

“The recent lockdowns in China have hit hard both domestic producers and those in neighbouring countries, many of whom depend on exports of polymers and intermediates to China,” said the IEA, adding shipments of ethylene and propylene to China in April fell by 50% year on year.

Estimations for the second quarter put China’s naphtha demand 11% lower, compared with the first quarter, compared with a typical fall in prior years of 4%.

However, European naphtha demand has also fallen sharply in the second quarter, with the IEA estimating that, in April, demand stood 100,000 bbl/day lower year on year, a decrease of 9.3%.

Meanwhile, European demand for LPG fell by just 40,000 bbl/day in April, year on year.

“With demand falling precipitously in Asia and Europe, naphtha cracks began to tumble, moving closer to parity with LPG,” said the IEA.

“Russia is the world’s largest naphtha exporter. Since the Ukraine invasion, naphtha prices have largely risen in tandem with crude oil, while LPG has risen more slowly. This boosted relative LPG cracking margins and promoted widespread feedstock substitution at flexible naphtha crackers.”

However, following the drop in naphtha cracks, the IEA said Russian naphtha exports have recovered in recent months, while China’s economy has reopened after lockdowns.

Thus, the IEA expects now “a gradual, partial recovery” in naphtha demand during the second half of 2022 and 2023.

After the decrease expected for 2022, naphtha demand is expected to rebound by 270,000 bbl/day in 2023, reaching 7.1m bbl/day globally.

Michael Connolly, Principal Analyst for Refining at ICIS, concurred that due to costs naphtha is being replaced on many occasions by LPG or ethane.

Refineries in Europe, registering high demand for gasoline as motorists take to the roads over the summer months, continue producing as a by-product light naphtha.

“Steam crackers are shunning light naphtha because of the high price versus LPG or ethane. This is lowering demand but, at high refinery runs to satisfy fuels demand, light naphtha is still being produced,” said Connolly.

“So, a refiner must find another home for the light naphtha. The only outlet is to blend to gasoline, but to do this they need the high-octane material to balance out the low-octane light naphtha.”

The IEA said the outlook for crude oil markets has sharply deteriorated in past months as the macroeconomic prospects of some major economies turn more negative.

“Rarely has the outlook for oil markets been more uncertain. A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side. For now, weaker-than-expected oil demand growth in advanced economies and resilient Russian supply has loosened headline balances,” said the IEA.

Although crude prices have fallen sharply in past days, with some moments trading below the psychological $100/bbl barrier, the IEA said “persistent physical crude price tensions and extreme refinery margins” highlighted underlying imbalances for crude and products supply.

The Agency went on to say the EU’s partial embargo on Russian oil, set to come into full force at the end of the year, could tighten crude markets once again.

“With readily available spare capacity running low in both the upstream and downstream, it may be up to demand side measures to bring down consumption and fuel costs that pose a threat to stability, most notably in emerging markets,” it said.

“Without strong policy intervention on energy use, risks remain high that the world economy falls off-track for recovery.”

Front page picture: A refinery in Burgas, Bulgaria 
Source: Artur Widak/NurPhoto/Shutterstock

Focus article by Jonathan Lopez