Spot prices strengthened modestly during the reporting period, supported by rising prices of related commodities and stronger price levels in Europe and Asia. August barrels traded as low as $4.25 per gallon last Friday, then gradually rose to $4.36 per gallon by Wednesday. The forward price curve remained backwardated, with September DDP barrels traded or indicated at a 10-15 cent per gallon discount to August, and October barrels were indicated at an additional 10-12 cent discount to September.
Supplies remain largely unchanged. The recent improvement in gasoline prices may lead to some short term improvement in reformer operations, but the upcoming transition into winter grade gasoline and the backwardation of gasoline prices limits the incentive to ramp up reformer octane production. Ethylene cracker economics continue to favor very light feed slates, which yield much less benzene-rich pygas. Some small volumes of pygas may ship to the U.S. Gulf from Asia, but similar streams from Northwest Europe and the Mediterranean will likely remain there.
Demand is largely unchanged. Consumers continue to carefully limit purchases to meet only short term requirements and supply chains have been strained as a result. Phenol demand, which has been weakening over the past 3-4 months has reportedly stabilized. Other derivatives have seen some modest improvement in demand, particularly from the construction segment.
On margins, higher naphtha prices led to a decline in reformate extraction margins this week and modest declines in toluene prices led to a small improvement in conversion margins. TDPs and HDAs remain well below breakeven, using contract prices for benzene and mixed xylenes.
Trade remains thin with many players on holiday. There has been a certain amount of industry selling, by both producers and consumers, with the trade generally on the buying side. $1225 was done for September at the end of last week, and $1245 and $1250 on Monday, before prices rose with higher crude and naphtha to $1265 and $1275 on Thursday. August has been more thinly traded, with prices at or a little below contract levels. $1295 and $1300 traded on Thursday.
Feedstock is more freely available, with crackers running at better rates as polymer consumers rebuild stock from low July levels. Naphtha is hovering close to the $950 level, buoyed by North Sea crude numbers above $115, which reflect production outages and Middle East tensions. Propane is trading within 3% of naphtha, again influenced by North Sea outages, which should prompt a switch to more naphtha cracking, though butane remains below $900 and still looks attractive as feedstock. The switch to heavier feeds will be gradual, and may not be felt strongly in pygas markets before November. There are shutdowns planned on large naphtha based crackers in Southern France and on the Rhine in September and October, as well as on a smaller unit in Finland.
Demand is seasonally weak, particularly for phenol, but does not reflect the miserable economic news which continues to surround the Eurozone. In general, supply chains can be seen to be carrying little stock, which limits the scope for further demand reduction. DeWitt expects a significant uptick in demand in September and October.
Crude sentiment fluctuated throughout the week with global economic news, but the general trend has been a stable to firm market. Weaker Chinese export growth for July was reported at 1%; that is lower than expectations at 8% and much lower than 11% for July 2011. Lower Japanese GDP growth for 2Q at 1.4% (previous expectation was 2.3%) also pulled down crude sentiment early in the week. Improved US retail sales, lower crude inventory and on-going tension in M.E Asia supported crude price. As a result, Brent crude price has been around $113-$115/bbl by Wednesday while Dubai crude price was around $108-$109/bbl. There has been some more gain on Thursday and it closed at $116/bbl for Brent and $94 for WTI during Asian trading time.
Naphtha price was relatively stable in line with crude sentiments. It has ranged $932-$946 CFR Japan from Monday to Wednesday. Prices then firmed up today to $958 CFR Japan in line with crude sentiment. Demand has improved with the restart of crackers from turnaround/ trouble, but supply is also steady and healthy especially from M.E. Asia and India. Argus DeWitt does not think there will be further drops in Asian naphtha price in the short term considering crude relationship. Naphtha demand is also increasing not only in Asia but also in Europe as demand from petrochemical sector would increase as summer season is finishing and relative cost competitiveness against LPG increasing. According to one report, around 1 mil ton of naphtha is booked from Europe in August/September to Asia that is similar level of usual monthly import figure.
Benzene market has been stable during the week in thin market due to informal festivals in Japan throughout week and Korean holiday on Wednesday. It created a 'pause' mood in the market as players traditionally take time off work, and also the directionless of the market as the extreme factors that drove sentiment in July has slowed down. For example, crude/naphtha trend has been relatively stable this week after a couple of months of heavy correction and rebound. There was roughly a 20% drop in crude prices from mid March to end June and rebounded again at around 15% up to last week. Extremely high US values for prompt parcel are getting eased. Unplanned shut plants from trouble are also restarting. Sluggish demand situation not showing any improvement. In this situation, players are in a cautious stance for future market trend this week comparing very positive outlook last 2 weeks.
Spot price of FOB Korea September has been stable at around $1150-$1165 with one deal done at $1160 on Tuesday. While an October parcel has been climbing from $1115-$1120 last Friday to $1140-$1150 by Wednesday with deals done in the range of $1120-$1140. The November market also started discussion at $1110-$1120 with a deal done at $1105 last Friday. The September/October spread significantly narrowed from $45-$50 to $15 as September short covering completed. October/November trend also backwardated by $20-$30. The market gained some momentum again on Thursday as players return from holiday and firmer crude/naphtha sentiment. There have been deals at $1155 for FOB Korea October and $1130 for November and assessed FOB Korea October at $1150-$1155.
US prompt tightness getting ease and realistic arbitrage, based on October DDP US Gulf price ($4.00/gal bid price = $1197) versus FOB Korea September price ($1160-$1170), has been shut last couple of weeks; but still relatively strong US/EU value is supporting Asian prompt value. Even if Asian monthly backwardation is getting stiffer on paper, players could still be interested in loading November to other regions because arrivals in the New Year are usually firmer compared to end of the year value. Export from July to US has been around 75kt and 1st half of August record also showing healthy at 50kt already.
Production from Asian crackers has been generally increasing but on-going turnarounds in China and refinery shut down in Japan has kept Asia balanced to tight despite strong production from operable PX related production with good margin. Derivatives operation is still at a reduced rate especially from styrene due to economical reason and also planned turnaround in Korea/Japan on September/October. Demand from phenol reduced a planned turnaround in China but as one new Korean phenol plant (300kt) plan to start in October will need more compensate. China domestic price stable at RMB 8750 (=$1152) that is still lower than international price.
On economics, the spread over naphtha for September benzene price base is down $195. That is a $60 decrease over last week mainly due to naphtha price increase. Spread over toluene is stable at $50 based on September with no change for HDA operation yet. Economics for TDP is getting better with improving MX/PX credit. Outlook for the benzene market is rather positive mainly due to firm raw material sentiment, reduced production and low inventory despite sluggish demand.
This graph compares weekly WTI crude, naphtha and US Asian benzene prices from January 2012 to present. The graph shows the relationship between arbitrage value and benzene spread over naphtha. The average of the benzene spread over naphtha by April was $153/mt while the average spread from the US price to the Asian price during same period was at $56/mt. From May to present the average spread increased to $258 as arbitrage widely opened at 170$/mt due to US prompt tightness. Historically it is difficult for Asian benzene spread from naphtha to be higher than $200 without support from US markets. Considering structurally the long benzene balance in Asia, it is very important whether arbitrage is open or not. As US prompt tightness eases, Asian naphtha margin will go back to under $200 by end of the year.