Poor gasoline blending economics remain
Refiners cut jet fuel yields, increasing naphtha stock
Naphtha CIF NWE August contract at plus-$60/mt premium to propane
Europe is facing a naphtha supply overhang with petrochemicals producers opting for cheaper LPG amid weak gasoline blending requirements and rising yields from refiners opting to run lighter, sweeter crude grades, with supply restraining factors for naphtha not enough to change the trend.
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The gasoline market in Northwest Europe has become increasingly uncertain amid concerns about a second wave of the coronavirus.
This bearish outlook has impacted demand for naphtha blendstock grades.
The premium of the Gasoline Eurobob FOB ARA August contract against the Naphtha CIF NWE equivalent remains significantly narrow, closing at $18/mt on July 23, and averaging $23.125/mt July 16-23.
Typically blenders prefer the premium to be at least $20/mt and higher to make blending viable.
Industry sources considered the differential uneconomical, which has put pressure on heavy naphtha grades that are usually treated in catalytic reformers to be added to the gasoline blending pool.
There is some support for the naphtha complex from petrochemicals, but expectations of near-term demand were mixed on uncertainty and as strategic refiners raised yields to support poor margins.
Increase in yields
Some European refiners were considering an increase in run rates, particularly utilizing sweeter and lighter crudes that yield more light products, such as naphtha. However, this has also led to a rise in yields of other refined products like jet fuel.
As the aviation industry was still suffering, refiners have opted to reduce jet fuel yields as much as possible, cutting the heavy tails into diesel and the light tails into naphtha.
Naphtha CIF NWE was assessed at a $25.75/mt premium to jet on July 23, averaging $15.54/mt on the week. Naphtha was first seen at a premium to jet fuel in April, and the trend has remained since then.
The resulting increase in naphtha supplies could alter naphtha’s specification toward a heavier grade overall with a higher aromatics component — best suitable for gasoline blending. However, as the gasoline-naphtha price differential was not economically viable, the heavy naphtha grades were further blended with lighter grades to produce open-specification naphtha grades, particularly sought after by petrochemicals makers as a feedstock.
“I see it everywhere across Europe right now, it is not a bullish thing for naphtha though,” a trader said.
However, petrochemicals makers were also seeking cheaper LPG feedstock options as olefins margins, particularly for ethylene and propylene, remain strong.
Propane, the usual naphtha competitor for cracking demand, was priced at a significant discount to naphtha.
The differential between Naphtha CIF NWE August contract and the propane equivalent was hovering around $60/mt, and was calculated at $64.25/mt on July 23, S&P Global Platts data showed.
Most producers having the flexibility to maximize propane utilization rates at this price level are seeking to do so.
Additionally, butane also saw some demand as a feedstock to compete with open-spec naphtha grades, while demand for butane in the gasoline blending pool was limited. Blending demand for butane typically is seen for winter gasoline specifications.
“Gas-nap spread is not taking any pressure off of open-spec as [components] usually disappearing into gasoline are competing with it,” another trader said.
Looking ahead, limited naphtha stocks could partly absorb the increase in output in the near term.
European naphtha stocks on floating storage in Northwest Europe and the Mediterranean remained close to zero. Inland available stocks were also limited while inventories at the Amsterdam-Rotterdam-Antwerp trading hub declined 15.5% at 397,000 mt, the lowest level seen since April 23, Insights Global data showed.
In the imports market, Russia, a seller of significant naphtha volumes to Europe, was also not expected to increase its naphtha exports in the near term.
However, with no heating demand for propane during summers, and not much blending demand for butane, naphtha will continue to face competition from LPG as the preferred petrochemicals feedstock.