The US naphtha market is poised for changing fundamentals in 2023, which could provide fresh outlets for anoversupplied Gulf coast.
These new flows are likely to focus on heavy virgin naphtha (HVN) exports, potentially to Europe and Venezuela. European sanctions on Russian oil products will kick in early in February next year and are expected to primarily impact the diesel and naphtha markets.
Increased refinery rates are expected in Europe to defray shortages resulting from the Russian sanctions, and heavy naphtha will be in demand as a reformer feedstock.
This may create an arbitrage pull for naphtha from the US Gulf coast to Europe, with Russian naphtha anticipated to head to Asia due to the sanctions.
The elimination of Russian naphtha supply should also keep European naphtha within the region, but possible shortfalls there will open space for US heavy naphtha imports.
This shortage will also curb European naphtha export opportunities to the US Atlantic coast — which had been pulling from the Gulf coast throughout much of 2022.
US naphtha market participants are also keeping an eye on an expected renewed flow out of the Gulf coast to Venezuela in 2023. The US loosened sanctions on Venezuela at the end of 2022 allowing major refiner Chevron to ship Venezuelan crude to the US.
The US had been a supplier of heavy virgin naphtha (HVN) as crude diluent to Venezuela prior to the implementation of the sanctions in 2017. Renewed Venezuelan demand for HVN as diluent could temper ongoing US Gulf coast naphtha oversupply, but so far it is unclear whether the sanction relief will extend to this.
Meanwhile, naphtha demand from the Asia Pacific has been suppressed by Covid-19-related shutdowns, particularly with the zero-Covid policy in China. The decline in consumption due to widespread shutdowns in Asia has depressed margins and demand in the petrochemical sector, with limited recovery expected in the new year.
US naphtha sellers had been focused on term shipments as well as arbitrage shipments to the Asia Pacific, but decreased demand in 2022 and into 2023 will continue to pad Gulf coast naphtha supplies.
More naphtha supply will show up at the Gulf coast with the start-up of a new crude distillation unit (CDU) at ExxonMobil's Beaumont, Texas, refinery anticipated in January. The major is expected to complete the third crude unit on site by the end of 2022, which should expand its crude processing capability to 250,000 b/d. This means more naphtha will be produced.
The push and pull of these changing dynamics will showcase significant changes in the US naphtha market in 2023.
Looking back in 2022
US Gulf coast naphtha markets faced diminished demand from stalwart outlets such as gasoline blending and exports in the second half of 2022.
Meanwhile, refiner demand for naphtha as a reformer feedstock rebounded amid ongoing CDU issues, keeping trading activity steady, if not robust.
See-sawing octane values kept the naphtha flow into gasoline blending unpredictable, particularly in the last half of the year. High octane prices typically suppress blending demand for sub-octanes such as naphtha, in order to balance out blend margins.
Naphtha demand from the US Atlantic coast was healthy throughout 2022, and especially picked up due to the loss of Russian imports when the sanction took hold in April. But the lack of Jones Act ships to bring material to the east coast from the US Gulf hampered this flow. Movement of segregated batches of naphtha on the Colonial pipeline was equally difficult, with a diesel shortage at the Atlantic coast keeping lines allocated to that end.
Markets for all US naphtha grades ended 2022 on a bearish note, with selling interest far outpacing demand at the end of the year.
The outlook in 2023 should overturn the year-end malaise with the prospect of new export outlets.
