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, as per Reuters. Propane is trading at a premium to naphtha much earlier than usual, a factor that is expected to keep the European naphtha refining margin well-supported. This is currently around minus US$2.60 a barrel, firming from below minus US$17 a barrel in early June. 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 about US$16/ton, having edged above it last week. It traded at discounts to naphtha of over US$100/ton 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.
While the East-West (arbitrage) is extremely strong and the very high demand in Asia is pulling propane out of the region, relative strength for naphtha will be maintained. Japan was waiting for cheap cargoes to build stocks. However, the cheap cargoes failed to surface mainly due to stronger demand from South East Asia, and inventory building by China over July and August. 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. 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.