Viewpoint: Exports, blending to keep naphtha afloat

Exports and gasoline blending will continue to support US naphtha markets through early 2021, making up for slow refinery demand amid thin reformer margins.

The Covid-19 pandemic kept global demand for gasoline persistently low for much of 2020, and naphtha became less attractive for refiners as a reformer feedstock as a result. But naphtha's varied end use meant gasoline blenders and petrochemical producers in Asia and Latin America could step in and fill the demand gap.

Going forward, the naphtha market outlook is very much dependent on demand for finished oil products such as gasoline and jet fuel. If demand does not recover, refinery rates will stay low and the prospect of more refinery closures rises. Covid-19 vaccines could restore demand in the new year, but the extent and timing of the potential market recovery are tenuous.

For more than half of 2020, naphtha production has been tightened by low crude runs, but the thinned supplies in turn kept the market largely balanced for much of 2020, even with gasoline demand suppressed by Covid-19 related lockdowns.

Naphtha serves as a reformer feedstock to produce gasoline and can also be directly blended into gasoline as a sub-octane component. Gasoline blending demand for naphtha surged this past summer and has maintained a high level into the winter in the New York Harbor market, where refining capacity has shrunken even further this year.

The New York Harbor market relies on naphtha imports, often from Peru and Colombia, as well as Europe, to fill the gap in gasoline blending. But imports dwindled this year partly because of lower crude runs around the globe and higher regional demand within Colombia. This led Gulf coast naphtha sellers to seek pipeline transportation of naphtha to the Atlantic coast.

But pipeline naphtha movements have not panned out so far, as each batch of naphtha is required to have CBOB buffers on either end. Poor CBOB shipping economics diminished the arbitrage for shipping naphtha as a result, and the New York Harbor market remained short on naphtha.

Exports out of the US Gulf to the usual Latin American and Asian destinations such as Brazil, Mexico, Colombia and Japan have typically soaked up some of the US naphtha length. But as Covid-19-related demand losses took a toll on Mexico, the country stopped buying in May, withdrawing up to 900,000 bl of spot demand from the spot market each month, mostly from the US Gulf coast.

Shipments to Asia also faltered in the first half of the year, but renewed petrochemical demand kicked in in the second half of 2020, reinstating the export flow from the US.

Demand from the Asia Pacific and Europe have typically been limited to light grade. But sluggish demand for heavy naphtha, which is used as a reformer feedstock in the US, has spurred arbitrage flows to these regions throughout much of the third quarter as well.

New gasoline blending regulations that remove the aromatic limitations could elevate naphtha's profile in the blending pool. Naphtha's higher RVP and lower octane qualities typically restrict its proportion in gasoline blending. Without the aromatic constriction, more heavy naphtha can be directed into the pool.

St Croix the wild card

Limetree Refining's 200,000 b/d refinery in St Croix, US Virgin Islands could provide some demand for US naphtha, which the refinery plans to use as a reformer feedstock to yield hydrogen to power the plant.

But the start of the refinery remains tenuous — some spotty demand for naphtha that emerged over the summer had petered out by the fall, and there have been no fresh exports out of the US to St Croix in the last quarter.

The refinery was originally planned to restart at the end of 2019, but the project has been delayed by corrosion issues as well as efforts to control Covid-10 risks among contractors at the facility.

The refinery offered some atmospheric bottoms and low-sulphur straight run fuel oil in November, which typically go into secondary units as a feedstock for finished products. They can also be used to blend low-sulphur marine fuels.

By Daphne Tan