The US naphtha market faces weak demand and bearish pricing pressure heading into the new year amid slack arbitrage and depressed domestic demand, likely heralding a change in trade flows.
Seasonally low demand for naphtha has exacerbated bearish fundamentals, causing outright cash prices for heavy virgin naphtha (HVN) at the US Gulf coast to descend to the lowest level in a year alongside a weak gasoline pricing basis.
However, cash values for HVN rebounded to 170.08¢/USG a week after dropping to 150.47¢/USG on 12 December. These values were comparatively even to prices in the same period last year.
Naphtha prices are expected to inch back up towards the new year, with an anticipated boost in demand as refiner replenish inventories following year-end taxes.
Light virgin naphtha (LVN) cash prices also decreased to the lowest level since July this year on 11 December at 138.25¢/USG, but similarly regained losses within a week.
The domestic HVN market had been depressed this year during a prolonged reformer outage at Marathon's Galveston Bay, Texas City, refinery. The reformer was reported to have begun restarting by December, but there was little improvement in reformer-grade naphtha demand in the wake of the supply build-up over the past six months.
Supply management efforts aimed at minimizing year-end ad valorem inventory taxes typically limits naphtha spot trading activity in December. This also likely bolstered interest in moving Texas and Louisiana naphtha offshore. Gasoline demand at the US Gulf coast was weak with no reprieve in sight, encouraging naphtha's passage to alternative end-use sectors.
Looking towards Venezuela
Soaring freight rates combined with costly demurrage-driven delays at the Panama Canal limited naphtha exports to Asia-Pacific, leaving US naphtha sellers scrambling for fresh outlets. Congestion at the Panama Canal started to affect naphtha flows to Asia-Pacific in July.
Fresh opportunity emerged in October this year with the US suspending certain sanctions on Venezuela's oil and gas industry, temporarily allowing the resumption of US exports to Venezuela.
The suspension of sanctions was initially met by lukewarm responses from US naphtha participants who were wary of stepping into an export sector that had been closed off by sanctions since January 2019.
However, building naphtha inventories at the US Gulf coast created renewed interest in exports to Venezuela.
Late last year, major refiner Chevron was granted the license to engage in fuel swaps with Venezuela, which entailed bringing Venezuela crude to the US and exporting heavy naphtha to Venezuela for use as diluent.
This year, another refiner was heard to have fixed a US naphtha cargo loading around 14 December to Venezuela.
The US naphtha flow to Venezuela is enabled through 18 April.
US Gulf coast naphtha exports to Asia-Pacific were subject to extensive delays and high costs of passing the Panama Canal. Auctions held for this typical passage from the US to Asia-Pacific reportedly reached as high as $1.6mn in December, with frequent fluctuations that made it difficult for sellers to reconcile costs.
Naphtha exports had been one of the primary outlets for the US market, alongside the reformer feedstock end-use sector and the gasoline blending market.
Reduced exports to Asia-Pacific due to the elevated freight costs looks likely to persist into 2024, which could dampen an anticipated increase in China's naphtha demand in 2024.
