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OIL QUARTERLY: European feedstocks crash, naphtha drops below LPG

Highlights

Heating demand props up propane

Naphtha prices plunge as global economy tumbles

Low feedstocks prices expected in Q2

London — The coronavirus outbreak curbed demand in a well-supplied first-quarter European feedstocks market, but the resulting convergence of weak LPG and naphtha prices failed to attract buyers due to the wider economic uncertainties.

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The pandemic caused a price drop across the barrel, but naphtha fell more sharply than LPG. In fact, propane priced at a rare premium to naphtha toward the end of the first quarter, finding steady support in the domestic heating market inland of the Amsterdam-Rotterdam-Antwerp refining hub.

Demand for propane in countries such as Germany and Poland increased as buyers filled their tanks ahead of refinery run cuts.

"We had to provide extra trucks to transport propane inland as demand is at a very high level," one market source said.

This demand closed the gap between propane and competing feedstock naphtha. The value of the S&P Global Platts CIF Northwest Europe propane large cargo front-month swap over CIF NWE front-month naphtha swaps -- commonly called the pro-nap spread -- was assessed March 27 at $10/mt, which was the first time since December 2017 that propane had been stronger.

Naphtha historically has commanded a significant premium, averaging $118/mt above propane during 2019.

As the coronavirus pandemic shut borders and constricted travel, European gasoline prices plummeted in Q1 to their lowest level on record. Butane and naphtha, both key gasoline blendstocks, were dragged down alongside the fall and did not see the same demand as propane.

They both reached multi-year lows in the first quarter. CIF NWE naphtha cargoes dropped to a 21-year low, assessed at $126/mt on March 23. Similarly, CIF NWE butane large cargoes reached a 21-year low of $104/mt on the same day.

The general lack of feedstock demand was accompanied by a petrochemical product overhang. Length in petrochemical products had been building throughout Q1, particularly in the ethylene and propylene markets. Petrochemical end-users have reduced demand, sources said, leading to an oversupply of petrochemicals and the oil feedstocks that create them.

WEAKER OUTLOOK

In the second quarter, European feedstock prices will largely depend on Asia and the Middle East.

European and US naphtha traders have been looking to send barrels into Asia, where markets have to some degree started to rebound from the coronavirus.

Similarly, US LPG cargoes that would traditionally flow into Northwest Europe and the Mediterranean could instead head to the Far East, which could give some support to European LPG prices in the form of shorter supply.

These moves will largely depend on LR1 and LR2 freight rates, which spiked in March after the East-West differential for naphtha widened to a multi-year high. Although this development put pressure on the arbitrage to Asia, the fresh naphtha price collapse made the route viable once more, according to shipowners and traders.

Another key factor is production in the Middle East, which is now less likely to be ramped up as some of the Q1 planned refinery maintenance work has now been deferred into Q2 due.

Bahrain's Sitra and Saudi Arabia's Ras Tanura have both pushed works to May or June, according to sources. Works are now also planned in April, instead of March, at Kuwait's Mina Al-Ahmadi.

In addition, some market sources have been skeptical as to whether those facilities undergoing works in Q1 will restart as planned.

Seasonal shifts are also bearish for LPG.

Butane typically sees a fall in demand ahead of the switch from winter to summer grade gasoline, as it is primarily a blendstock in winter-grade gasoline. Demand for propane will naturally fall moving into summer time as heating fuel requirement wanes.

Without an uptick in petrochemical cracking demand, LPG and naphtha are en route for a bearish Q2.

"There are questions around demand from petrochemical crackers," one second market source said.

Support for the feedstock markets could come in the form of European refinery run cuts.

Refineries in France, Italy, Germany, and Spain have all been heard reducing throughput as a result of the demand slump. Some, like Italy's Falconara, are completely shutting down, whereas France's Grandpuits and Feyzin, which closed for maintenance, are not restarting.

The European feedstock market could seek support from refinery run cuts to balance the demand loss caused by the coronavirus.