Pricey propane boosts European naphtha refining margins

LONDON, Sept 10 Mon Sep 10, 2012 5:56pm IST

Related Topics

Stocks

   

LONDON, Sept 10 (Reuters) - European refiners are reaping the bonanza of improved demand for naphtha as alternative petrochemical feedstock propane has run up in price due to a spike in Asian and Latin American demand and a fall off in supplies from the Middle East.

Propane is trading at a premium to naphtha much earlier than usual this autumn, a factor that is expected to keep the European naphtha refining margin well-supported. This is currently around minus $2.60 a barrel, firming from below minus $17 a barrel in early June, according to Reuters data.

The relative strength is a reflection of the fact that naphtha is in demand by petrochemical companies, who have switched to using naphtha after propane shot up in price more quickly.

Propane, which is also known as liquefied petroleum gas (LPG), is used to heat off-the-grid homes and in agriculture. It usually rises above naphtha in price in the northern hemisphere winter as temperatures fall.

However, due to a propane supply crunch in the Middle East and West Africa, and strong demand in some Asian countries, propane has started trading at a premium to naphtha in late summer, earlier than usual.

Propane is currently priced at a premium to naphtha of some $16 a tonne, having edged above it last week. It traded at discounts to naphtha of over $100 a tonne during the height of the summer.

Traders and analysts pointed to strong demand from Asia, where the prompt naphtha refining margin inched to its highest in five months on Monday.

"The East-West (arbitrage) is extremely strong and the very high demand in Asia is pulling propane out of the region," said Olivier Jakob, an oil analyst at Petromatrix.

"While this lasts, it's going to maintain the relative strength for naphtha."

STRONG DEMAND

One trader highlighted Japanese propane demand, which has been higher than expected. "They were waiting for cheap cargoes to build stocks, but those cheap cargoes didn't come," he said.

This was mainly due to stronger demand from South East Asia, and inventory building by China over July and August.

India is also encouraging the use of propane instead of kerosene, although both are subsidised. This demand should remain robust for some time, as the country's government said on Friday that it has no plans to raise domestic fuel prices.

Traders said there was also good demand for European propane in Venezuela, where domestic supplies have been hit by the temporary closure of the Amuay refinery after an explosion late last month. Mexican demand has also risen due to falling domestic production, a trader said.

Meanwhile, LPG exports from Saudi Arabia have been falling due to its growing domestic demand and the expansion of its petrochemical industry.

Chevron, through a joint-venture with Saudi Arabia, recently started commercial production at the Saudi Polymers Company (SPCo) petrochemical project in Al Jubail.

"Saudi domestic use of LPG is rising for petrochemicals. New complexes came online," said one market source. "Chevron's new complex uses 100,000 tonnes of propane a month."

Iranian exports have also started falling from around 6-7 cargoes a month to 2-3 a month as winter approaches, the source added. West African exports are also said to be lower due to inefficiencies at its two production plants.

The moves will be closely watched into the end of the year by traders who can win or lose large sums quickly on the spread between propane and naphtha prices.

"The moves can be brutal," one trader said. "Where some inter-product spreads might move $5 or $6 over a month you can be $30 out of the money on the propane/naphtha spread in no time."

FILED UNDER:

Surprise Rate Cut

Reuters Showcase

Insurance Bill

Insurance Bill

Opposition support bolsters prospects for insurance reforms  Full Article 

SBI Share Sale

SBI Share Sale

SBI's up to $2.4 billion share sale likely by end April - sources   Full Article 

Eicher Share Sale

Eicher Share Sale

Truck maker Volvo sells shares in Eicher Motors  Full Article 

Beef Ban

Beef Ban

After beef ban, Hindu groups force abattoirs to close   Full Article 

Monsoon Season

Monsoon Season

Exclusive - India expects better monsoon rains this year  Full Article 

Services Growth

Services Growth

Services growth at eight-month high in Feb - HSBC PMI  Full Article 

'India's Daughter'

'India's Daughter'

Documentary on 2012 Delhi gang rape banned in India  Full Article 

Capex Slashed

Capex Slashed

Cairn India slashes 2015-16 capex on falling crude   Full Article 

Strong Start

Strong Start

Airwaves auction off to strong start, bids near $10 billion.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage