OUTLOOK ’18: Different forces at play for naphtha and gasoline demand

LONDON (ICIS)–While the outlook for Europe’s naphtha and gasoline market continues to be contingent on movements in upstream oil prices, progress made towards the gradual rebalancing of the global oil market means other supply and demand factors are increasingly important as price determiners for both products.

Crude oil outlook
In Europe, the price of both naphtha and gasoline closely track movements in the region’s benchmark crude, trading relative to ICE Brent crude oil futures.

Despite missing its monthly production-cutting goals in six of the 12 months until November 2017, OPEC’s relative success at reducing oil output has contributed to setting the oil market onto a healthier path for the next year.

As of 18 December 2017, the US Energy Information Association forecasts Brent spot prices to average $57/bbl in 2018, up from an average of $54/bbl in 2017. As well as creating upward price momentum, OPEC’s supply curtailment has flipped the crude oil market into backwardation, further discouraging inventory building.

The backward structure of the crude market means that current spot oil prices fall below those for delivery in future months, suggesting tightening supply and strong demand right now. This indicates a bullish trajectory for oil for the coming year.

Refining Margins
A rise in oil prices could come as bad news for refinery profit margins if increases happen sharply in the coming months. Refining margins already took a hit in December 2017, falling to a 15-month low due to weakness in the gasoline market as ballooning US inventories led to a dip in export demand.

Despite uncertainty regarding further weakening, upcoming refinery maintenance at the beginning of 2018 is likely to pull margins back to more attractive values.

“On the margins front, we expect fairly healthy levels over the first quarter of the year, with European refiners particularly boosted by the impact of hefty Middle Eastern turnarounds and the associated pull on gasoline barrels through into the spring,” said Sam Alderson, Oil Analyst from Energy Aspects.

As well as boosting refinery margins, traders will also welcome the planned maintenance as consumers turn to the spot market to buy naphtha and gasoline.

“I would say first half of the year looks relatively strong, especially Q1, when there is lots of refinery maintenance. We should get demand out of these,” said one naphtha trader.

Naphtha demand outlook
Naphtha demand from the petrochemical industry has been relatively robust for several months, after enduring stiff competition from alternative feedstock propane in the first quarter of 2017. The propane-naphtha spread reached figures as low as -$94/tonne on 13 April, making propane temporarily a more attractive material to crack.

Propane and naphtha can both be cracked to produce a range of petrochemicals, and most refiners can switch between the two depending on the attractiveness of the price spread and potential profit margins at any given time.

There are expectations that naphtha demand from European refiners will hold up during the first half of 2018, but increasing US shale production and the resulting increase in LPG supply could pose a threat for demand later in the year.

“The problem is that we think that with expansions in the US we will have more LPG supply,” said one trader. “They are already cracking more LPG in the second half of next year, and there are cracker maintenances too so Q3 might not be very good.”

Gasoline demand outlook
Activity across the Atlantic could also influence Europe’s gasoline market next year, as it did at the end of 2017, when US stocks of gasoline rose for six consecutive weeks until 21 December. The gasoline glut caused a decrease in export demand from Europe to the US, with no US-bound cargoes detected from the key Amsterdam-Rotterdam-Antwerp (ARA) hub in the month until 13 December.

US oil production is predicted to reach record levels during 2018. This is likely to generate more regional gasoline production and potentially further weaken Europe’s gasoline market. Middle East refinery maintenances in the first half of the year could work to offset the impact, as well as efforts to ramp up activity on alternative export routes such as western Africa, sources said.

Despite countries such as the UK and France pledging to ban all sales of gasoline-fuelled vehicles during 2017, the prospect of EVs usurping gasoline demand is a distant worry for Europe’s gasoline market. According to the International Energy Agency, new registrations of electric cars hit record peaks in 2016, with more than  750,000 sales worldwide, which brought the global stock to 2m.

But alternative fuel vehicles still make up but a tiny fraction of Europe’s overall vehicle usage, with gasoline fuelling over half of the region’s cars in 2015, according to ACEA (the European Automobile Manufactures Association).