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Viewpoint: Naphtha length poised to persist in 2018

28 Dec 2017 13:00 GMT
Viewpoint: Naphtha length poised to persist in 2018

Houston, 28 December (Argus) — Elevated N+A naphtha cash prices have belied the burgeoning supplies attributed to increased processing of light crudes in the US this year.

Sellers faced complacent buying as supply far outpaced demand throughout the year, but domestic naphtha prices remained stronger because of a pricing structure tied in to the US Gulf coast conventional gasoline basis.

Cash prices for N+A naphtha spiked at the end of August in the aftermath of Hurricane Harvey's landfall near Corpus Christi, Texas, in late August. An already compromised Gulf coast refining structure was exacerbated by Hurricane Nate hitting the Louisiana coast near the mouth of the Mississippi river. Refinery operations were also affected by logistical difficulties with ports and waterways closed by the storms.

Heightened gasoline prices led to high N+A naphtha prices — N+A naphtha is traded at differentials to the Gulf coast waterborne conventional gasoline (GC WBM M-grade) — and this in turn led to closed arbitrage as US naphtha prices gained ground globally.

Despite the closed arbitrage, US naphtha sellers continued to export to the Asia-Pacific and Latin America. Mexico, Colombia and Venezuela remained the export mainstays in the south while the Asia-Pacific solidified its position as an export outlet this year.

Mexico suffered an earthquake mid-September, leaving uncertain refinery operations in its wake. Mexico typically purchases one to three cargoes of heavy N+A naphtha from the US each month for use, but this offtake was stemmed following the temblor, leaving more naphtha supply in the US.

Venezuela's heavy N+A naphtha offtake was cemented by a term contract extending to the end of the year, keeping a steady flow there.

In the fourth quarter, the US showed record exports, particularly to the Asia-Pacific. In November-December, at least nine MR-sized cargoes of mostly heavy N+A naphtha set sail for the Asia-Pacific marginal arbitrage. This trend is expected to continue in the short term as US naphtha length persisted.

All naphtha end-use markets faced challenges this year. Reforming margins faltered in the latter half of the year after a strong start. Gasoline demand is seasonally lower in the winter months and lower gasoline prices are expected to depress reformer utilization rates, which would diminish naphtha feedstock offtake.

Petrochemical buyers returned to the naphtha market this year, but again, in the fourth quarter, demand from this sector clamped shut as low LPG prices presented better economics as cracking feedstock.

Gasoline blending demand was also frail in the winter months, with cheaper butane eating up naphtha's market share. This seasonal shift is expected last through the first quarter of 2018 when winter gasoline blending ceases.

Butane prices are almost 50¢/USG below full-range N+A naphtha, compared with around a 36¢/USG spread at the same time last year.

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