| LONDON, Sept 10
LONDON, Sept 10 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
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
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."
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
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