Slack demand from major outlets depress Europe naphtha

By Cuckoo James

LONDON (ICIS)–Europe’s naphtha prices have hit three-month lows this week as slack demand from major outlets depressed the market, industry sources said on Friday.

With cracker run rates in Europe estimated at 80% of plant capacity and alternative feedstock propane selling at least $100/tonne cheaper, demand for naphtha as a petrochemical feedstock has been especially muted.

“Propane keeps coming off, so at -$110/tonne to naphtha it might just be more tempting for some,” a trader said.

A petrochemical buyer said: “Definitely propane would be attractive as it is at a discount of $110/tonne to naphtha in February.”

Late on Tuesday evening, trading firm Gunvor sold a naphtha cargo to Glencore at a three-month low of $897/tonne CIF (cost, insurance & freight) NWE (northwest Europe), ICIS data showed.

The European naphtha differential over ICE Brent crude oil futures fell to a three-month low of minus $5.65/bbl on Tuesday, dropping from minus $5.00/bbl on Monday evening.

Upstream volatility in ICE Brent crude futures also contributed to the drop in prices, with naphtha recovering some of its losses as crude prices rebounded later in the week.

With demand from the domestic petrochemical outlet sluggish, sellers have been more dependent on the other major outlets for European naphtha – the US gasoline sector and the Asian petrochemical markets.

However, the transatlantic gasoline trade route to the US East Coast was only marginally active as the cold snap in the US reduced demand for the transport fuel, taking naphtha demand down with it.

“Gasoline cracks are not recovering. Demand is still very weak,” a second trader said. Naphtha is used as a blendstock in gasoline production.

Meanwhile, high freight rates were stopping cargoes from being shipped to Asia despite a wide spread between European and Asian naphtha prices.

Consequently, naphtha exports to Asia have dropped to less than half the volumes fixed last week, as per shipping sources.

Freight rates for Long Range 2 (LR2) tankers that are used to transport naphtha to Asia were still high at 3.1m US dollars, while traders were forced to pay out 2.6m US dollars for Long Range 1 (LR1) vessels.

The second naphtha trader said: “Freight is still too high keeping the arb [arbitrage] just workable from the Med.”

However, the Mediterranean is tight on naphtha as volumes from Russia have fallen over the last three weeks compared with early January.

Asian markets have entered a heavy cracker maintenance season which is expected to last until June with six crackers due to be taken off in Japan.

“It has been very quiet,” the first naphtha trader said.

Moreover, emerging market currency woes could adversely impact demand for European naphtha which is normally traded in US dollars. The second trader said: “I believe that ultimately it will impact Asian demand.”

Demand from the Asian and European petrochemical sector is unlikely to improve unless European naphtha prices drop further, sources added.

“If cracks keep collapsing in Europe east-west [arbitrage] will open up,” the second trader said.