Abundant naphtha continues to benefit European crackers even as prices rise

London — European cracker margins have eased again this month even as naphtha prices continue to recover, with crackers running at closer to normal rates, market sources said.

After the ethylene May CP settled Eur100/mt lower on the month at Eur620/mt FD NWE following similar losses for naphtha during April, May has seen naphtha prices stage a recovery on the back of a rising crude oil complex.

Naphtha CIF NWE closed at $183/mt Wednesday, down $5.75/mt on the day. However, during the first week of May naphtha prices averaged $167.90/mt, and that was up from an April average of $138.8/mt, S&P Global Platts data showed.

A significant product glut built up in Europe due to lockdowns and slower economic activity, which also weighed on demand for naphtha feedstock grades (mainly open specification naphtha) and gasoline blendstock grades (such as light virgin naphtha).

Additionally, a record spike in freight costs due to a lack of storage for surplus product in April applied further pressure, with naphtha FOB MED cargo and naphtha CIF MED cargo assessments seeing their lowest ever values at $10/mt and $71.25/mt respectively on April 27, Platts data showed.

However, with lockdowns set to ease in May across most of Europe, and refiners committing to cut oil production further in May, naphtha prices and demand were given moderate boost, sources said.

This caused European cracker margins to ease by around Eur84/mt to Eur233.88/mt in the spot market over the first six days of May. In the contract market they were down Eur52/mt at Eur610.74, but that was still around 40% higher than January levels, Platts data shows.

"We noticed that cracker operating rates are high not only in Asia but also in Europe because of the low naphtha cost," a source said. "Cracker operators postponed turnarounds for this reason in order to benefit from the extra profits now."

European propane traded at a steep premium over naphtha for all of April, with the highest premium seen on April 21 at $103.25/mt, a multi-year high. The propane-naphtha spread -- the difference between Platts propane CIF NWE large cargo swap and Platts naphtha CIF NWE swap -- was assessed at $22.50/mt Tuesday, up $5/mt from the previous assessment, Platts data showed. Although the spread narrowed, propane was still at a premium over naphtha, supporting petrochemicals producers choosing to utilize more naphtha as the cheapest of the two feedstock.

However, some market participants said they were wary of the path of naphtha prices and demand in the near term.

"I think people just stopped cracking some propane; the heavy co-products of naphtha cracking are still very weak so naphtha faces headwinds for now," a naphtha trader said.

As storage sites were still at capacity for products across Europe, even an increase in demand could take some time to offset the surplus.

"Of course, this situation is extreme and will not last forever; oil will start to rise again," another source said. "Supply and demand will also rebalance."

"If oil remains lower, however, the US situation will stay more or less flat from a cost perspective," the source said. "In Europe, petchem crackers are closing the gap on costs with naphtha, but how it will continue is quiet uncertain at this point."

At current prices, Europe remains the highest priced region for ethylene. Even at current spot price discount levels heard at 50-60% for the May CP in Europe, there may not be a big enough gap to support eastbound exports, market source said. However, with the current levelling up of European naphtha costs with US ethane, the benefits are being reaped at the cracker level, with optimism also linked to sustained polyethylene demand due to increased demand for packaging during the coronavirus pandemic.

"If you look at the US, ethane seems to be close to naphtha now," a source said. "More market for European PE, and no imports, plus good demand also for PS -- all going into packaging, single-use cutlery, things like that being the driver. Single-use plastic seems to have come back for the time being."