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European Naphtha Paper Market Soars Despite Weak Physical Demand

European paper market naphtha prices continue to rise, following a trend seen since the beginning of August, even as weak physical demand curbed some of the gains.

Platts assessed the front-month/second-month spread up $7.75/mt since July 31 at plus $4/mt on Aug. 23, the highest value since May 31, S&P Global Commodity Insights data showed.

Meanwhile, Platts assessed the European naphtha crack up $3.25/b at minus $10.35/b over the same period, reaching its highest value since June 2.

Tight global supply
One of the factors behind the rise in prices has been supply, with sources both in Asia and Europe reporting issues with the availability of naphtha.

Sources said Russian exports in August, which predominantly head to Asia, were on track to register a third consecutive monthly drop on the back of refinery maintenance, logistical issues in the country and strong blending demand amid a tight gasoline market.

“Russia will have more refinery maintenance [in the autumn],” one European-based source said. “We also have a supply pull in the Gulf.”

Meanwhile, naphtha inflows from the Europe and the Mediterranean are key to meet a net shortfall in the East of Suez, but arbitrage has been reportedly weak, and no naphtha shipments were seen as delayed in the Suez Canal or in the southbound queue for the Suez Canal, according to Platts cFlow, ship and commodity tracking software from S&P Global.

“People think that once the [Russian] refineries are back, everything will be good. But it is a long journey [to Asia], especially if you are stopping on the AG first,” a Europe-based trader said.

Weak Demand in Europe
However, despite tight supply and a renewed bullish sentiment, physical demand in Europe remains poor and the rally seems to be focused on the paper market, according to sources.

“Spreads seem up on the back of a stronger front crack, [which is] well bid by non-physical [market] people and so entirely fundamental-driven,” said a Europe-based paper market trader. “[Paper market] liquidity has been poor for a while.”

Some sources said the physical side was a “mess,” especially as petrochemical demand was at extremely low levels on fundamentals, with the situation only partially offset by gasoline blending activity.

“There is still decent blending demand but only little clips, and very low demand at [petrochemical] crackers,” said a European broker.

Sources said Northwest European crackers were running at low rates of 60%-70% in mid-August.

Moreover, demand for naphtha from the petrochemical sector in Europe is expected to remain weak amid feedstock competition against LPG. Propane prices are unlikely to rise too much amid robust supply and sluggish demand should temperatures remain mild in Northwest Europe, sources added.

“Gasoline may be [supporting the market], but [there is] no chance for petchem demand,” said the first source. “Winter [in Europe] is not expected to be super cold,” added the source.

Platts assessed the front-month CIF NWE naphtha swap discount to the equivalent gasoline swap down $2/mt on the day at $269.50/mt Aug. 23.

Resilient gasoline demand
Meanwhile, gasoline strength has been driven by a late surge in summer demand. Oxygenated E5 FOB ARA barges have been particularly well-supported. Germany, the primary E5 demand hub in Northwest Europe, hit a two-year high in gasoline imports by volume on the week beginning Aug. 14, according to Kpler data.

Elsewhere, demand from the US continues to add support to the gasoline complex. US Atlantic Coast imports were at 759,000 b/d on the week to Aug. 18, up from the August 2022 average of 575,250 b/d, according to the Energy Information Administration.

The gasoline crack has been volatile but remains elevated on the back of a strong driving season. Platts assessed Eurobob FOB ARA September at $26.96/b Aug. 23, up from $17.83/b June 1.

Propane a cheaper feedstock
Propane has been a cheaper feedstock than naphtha for many months now, and NWE flexi-crackers have been opting for the former. This dynamic should keep weighing on naphtha sentiment, especially with market players expecting propane prices to remain low.

Although winter is fast-approaching and typically the propane market would be expected to strengthen, supply has continued to outpace demand.

While some sources said the milder winter last year led to less spot tons being available in the market this year, they still see supply levels saturating the global propane market.

According to the US Energy Information Administration, propane and propylene stocks were at 92.286 million barrels in the week ended Aug. 18, the highest level since November 2020.

“The main takeaway [from the EIA report] was the accelerated stock building in mid-August, as projected, because of a significant week-on-week demand decrease of 200,000 b/d from the highs of above 2.6 million b/d during the first half of August,” analysts at S&P Global Commodity Insights said.

“Production so far in August remains elevated when compared with July, up 125,000 b/d on average. The higher production has technically helped increase product supplied, even though the summer seasonal lull for domestic demand is relatively stable,” the analysts added.

Source: Hellenic Shipping News