Viewpoint: Export issues may prolong naphtha length

The US Gulf coast naphtha market's first-half 2018 export-orientation is threatened by a possible decrease in demand from Latin America, as well as sanctions and trade tariffs.

The bulk of that export demand in the first half of 2018 was to Venezuela. Mexico demand was sidelined for much of the first half of the year, stemmed by refinery damage suffered during an earthquake in September last year. The marketing arm of national oil company Pemex, Petroleos Mexicanos (PMI), only emerged to purchase at the beginning of the year and again about four months later.

Venezuela currently draws up to four cargoes of heavy virgin naphtha (HVN) for use as diluent each month, amounting to over 2mn bls. Venezuela typically also purchases a 300,000 bl cargo of heavy naphtha for reformer feedstock a month.

It is widely believed that since November Venezuela has an exchange program with its suppliers following its inability to pay for naphtha due to US sanctions. The traders collect crude from Venezuela in exchange for naphtha, among other refined products. The nuances of this process is well-guarded by the participants, with US suppliers working alongside Asian-based traders.

But with Venezuelan crude output expected to decrease, it is unclear how much US naphtha can continue to flow. If naphtha exports to Venezuela are significantly reduced, that supply will weigh on the US domestic market.

Another export flow that had flourished over the past several years was from the US to the Asia Pacific. This route is now also pressured by possible counter-sanctions imposed by China as US trade tensions mount. China is expected to seek alternative supplies if tariffs are implemented. Naphtha has not been confirmed as one of the products that may be subject to China's counter-tariffs in August, but this could swiftly change. This, combined with possible thinning of Venezuelan exports, propagates increased length in the US naphtha market.

Naphtha has always been fraught with competition from alternative products, depending on pricing. Naphtha prices have been boosted in recent weeks by elevated pricing basis such as conventional gasoline for N+A grades and natural gasoline for light naphtha. The high cash prices have effectively closed naphtha arbitrage out of the US on paper, but cargoes continue to move offshore to fill tender and term obligations.

More naphtha cargoes are also offered into the Gulf and Atlantic coasts amid heightened US prices. Colombia has been offering at least one full-range N+A naphtha cargo loading out of Mamonal each week.

La Pampilla and Talara heavy N+A naphtha cargoes from Peru continue to head to the US as well, albeit with less frequency than the Mamonal barrels. Much of the cargo supply had been absorbed by the US Atlantic coast in the past month, with thriving demand from the gasoline blenders for low sulphur barrels bearing higher octane levels.

Despite the uncertainty tied in to export opportunities and competition from alternative products, some market participants remain optimistic.

"Naphtha is like a gypsy," said a trader. "It finds a new place to live."

Indeed, naphtha continues to be channeled into end-use markets from reforming to gasoline blending to petrochemical cracking to crude diluent, keeping the barrels moving even in a long market.