European naphtha saw record price highs in 2007, first on its own merits and then again, as demand slackened, on the back of crude.
But increased LNG production and growing naphtha supply in Asia threatens to reverse the traditional Europe-Asia trade flow in 2008, leading to a "death spiral" in price. Platts Tim Worledge (download podcast) charts the volatile fortunes of a key part of the oil barrel.
Increased LNG production and growing naphtha supply in Asia threatens to reverse the traditional Europe-Asia trade flow in 2008.
For what is a much-relied upon part of the oil barrel, naphtha is surprisingly anonymous amongst crude's products. These mostly fall into two categories; those that are widely known and used, such as butane, propane, gasoline and diesel; and the "self explanatory" products; If they had to, most people could have a good guess at the main uses of jet fuel or fuel oil.
Naphtha doesn't enjoy that sort of exposure. Even within the industry, when it comes to explaining naphtha the product is often swept quietly beneath the umbrella of 'light ends', those carbon-challenged atoms that float their way to the upper reaches of the refinery distillation tower.
Occasionally text books and refining resources will overlook its presence entirely. But naphtha, despite its low profile, is not only one of the earliest known crude products, but one of the most widely used.
Naphtha is an umbrella term for a range of liquid hydrocarbon materials obtained from crude oil that share the same properties - they are all highly flammable, extremely volatile and largely colorless. Kerosene and gasoline are both, technically, naphtha.
In Europe, naphtha comes predominantly from simple refineries and in a range of forms identified by their paraffinic content.
Paraffinic content is the key to modern naphtha use; lower paraffinic material tends to move to the US to be used as a blend stock for gasoline, while higher paraffinic naphtha is generally used as a feedstock for the petrochemical industry.
It's as a feedstock for catalytic crackers in petrochemical plants that naphtha derives most of its global demand. Through the cracking process, naphtha's carbon chains are broken down to form ethylene, a key building block in plastics.
According to the Association of Petrochemicals Producers in Europe, European cracking facilities in 2005 had the capacity to produce over 26 million tons of ethylene.
With a ratio of feedstock to ethylene of three to one, that roughly equates to demand of 75 million tons of feedstock - and although propane and butane play a part, it is naphtha that comprises the bulk of that demand.
Rising prices
'Open spec' is a mid-range paraffinic naphtha that makes up the bulk of naphtha appearing on European markets. The vast majority of this, whether through term contracts or purchases on the spot market, ends up in petrochemical crackers.
But not always in Europe; over the course of 2007, it was petrochemical demand from Asia, where the plastics industry is already enormous and still growing rapidly, that dictated the tone of the European market.
The naphtha crack -- the difference between the price of crude and the price of the naphtha -- gives a clearer indication of the market's strength than the outright dollar price. The crack had languished in negative territory throughout 2006, a consequence of new refining capacity opening in India towards end-2005, which greatly increased the supply and availability of naphtha globally.
However, the opening of new petrochemical facilities in Asia at the start of 2007 impacted prices immediately and naphtha cracks became positive on January 10 for the first time in well over a year.
Demand remained consistent from the petrochemical sector as the price of alternative cracking feedstocks, such as propane and butane, remained relatively strong, buoyed by demand from heating and gasoline blenders respectively. In addition, supply from the new refineries in India proved inconsistent, causing the Asian market to continue to draw on European barrels.
As Asian demand kept the Europe market tight, the Platts delivered Northwest Europe naphtha assessment saw a prolonged period of strength, with cracks consistently hitting year to date highs month on month of $3.75/barrel on February 27, $5.2/barrel on March 19, $7.5/barrel on April 30, finally soaring to an all-time high of $9.4/barrel on May 11. Alongside the rise in cracks, the outright dollar price also gathered strength, reaching a new high of $711.25/mt on May 11.
At that level, sources said petrochemicals were being priced out of the market, preferring LPG as an alternative to naphtha wherever possible. However, any slack in demand was picked up by gasoline blenders.
"The economics make sense for gasoline blenders right now," a source stated, "and that is reflected in how much material we are seeing move to the blending pool." Another source put it more succinctly; "Everyone wants naphtha and there simply isn't enough around."
From that point, the only way seemed to be down, and a prolonged gradual decline in crack values followed as crude gained strength and Asian arbitrage economics started to come into question. By end-May 2007, traders were suggesting that cargoes heading to Asia were being pushed from North west Europe rather than pulled by demand from Asia.
Traders estimated that, in June 2007, a further 600,000 mt of open spec naphtha had been sent from Europe to Asia. Asian demand began to buckle under the weight of oversupply, but the European market, deprived of such huge quantities of material, experienced a tightness that again propelled it to new records.
However, as the arbitrage to Asia closed, demand in Europe began to peak as the tightness brought CIF NWE naphtha to a fresh all-time high of $714.5/mt on July 12.
Next page: Price and margin diverge in 2007
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