Propane Risks Falling Off Europe’s Feedstock Slate

As propane’s discount to naphtha has shrunk to its narrowest point in nearly a year, the market is watching for signs that propane could slip off the petrochemical feed- stock slate in Northwest Europe in favor of naphtha, S&P Global Platts reported in late November.

Since late October, propane’s discount to naph- tha in the region narrowed almost continuously, reaching its smallest discount since Jan. 2 on Nov. 22 at $40.75 a metric ton (MT). That marked a dramatic reversal from April, when the propane-naphtha spread was at its widest point in nearly three years, but was much lower than last year in November when propane was nearly at parity with naphtha.

“Usually [minus] $50/MT seems to be a turning point,” said a petrochemical market source, noting that petrochemical manufacturers tend to cut back on propane once the discount sinks below that level. Other market sources noted that, at current levels, the market is watching for public reoffers of propane cargos from petchem buyers, a signal the tide could be turning back toward naphtha.

However, other petchem sources said that flex- ibility constraints and some inertia on the part of system operators has meant a significant switch in feedstock purchases from gaseous feedstocks to liquid has yet to be seen. Certainly, European naphtha participants will be keeping a close eye on the narrowing spread as a weak overall demand outlook continues to keep values sup- pressed. Rather than bullish fundamentals on the propane market, the narrowing discount is largely a function of the naphtha weakness, according to sources, particularly its vulnerability to the sinking crude oil price, S&P Global Platts reports.

Further, the naphtha cif (cost, insurance, freight) cargo market in Northwest Europe tends to track moves more closely than the propane cif cargo market. The December cif Northwest Europe naphtha crack swap was last heard pricing at minus $8.75/bbl, near four-year lows despite a recent dip in crude oil prices, which typically occasions an inverse move in the paper contract. Funda- mentally, both markets have been struggling with bearish fundamentals due to slow consumer heating demand and weak gasoline blending demand.

(SOURCE: The Weekly Propane Newsletter, December 10, 2018)