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DeWitt's News
 
Key Drivers - Aug 10,2012

Crude, Gas & Naphtha

Americas Energy bubbling up along with Equities markets; Regrade falling.
Europe Crude, gasoline and naphtha have hit a 3 month high.
Asia Naphtha continues to surge in line with firm crude oil.
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Market Commentary

Energy & Feedstocks - Newsletter#: 1868
Date: 07/19/2012

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Americas

Very little spot activity was confirmed done this week. July prices remained firm, with volumes done in the $5.11 per gallon-$5.17 per gallon range. Today, however, market sentiment “weakened” a bit, with prompt offers at $4.95 per gallon and bids at $4.75 per gallon. The steep backwardation remains, but today’s ranges indicated a bit of flattening of the forward price curve. Earlier this week, the price spread between July and any September barrels exceeded $1.00 per gallon; today, the September bid-ask range was $4.05 per gallon-$4.20 per gallon, indicating backwardation of 70-75 cents per gallon.

Such backwardation continues to confound the market. Consumers through all value chains are looking for ways to reduce price risk exposure, and in many cases their actions only result in higher prices. Buying future barrels on a floating price basis, indexed to either a CP-related or spot-average mechanism, has created an enormous short position in the market. Traders and producers, looking at the steep backwardation, have lacked incentive to increase production or commit to moving additional volume into the U.S. Gulf from abroad.

Some consumers have taken decision to reduce operating rates, and benzene consumption, in August and at least one has decided to take its plant down altogether.

Prompt supply remains tight, despite weakened demand. Domestic output is largely unchanged over recent months. Gulf Coast refinery utilization rates remain very high. Although overall refinery activity rates are strong, reformer economics have been constrained by very weak co-product credits from light products (hydrogen, ethane, propane and butane) which often have transfer prices pegged to natural gas. The recent drop in naphtha prices, however, has led to some improvement of reformer margins, particularly with octane and aromatics contributions. If that phenomenon is sustained, more benzene should make it to market in the coming weeks. Pygas remains extremely limited. Toluene conversion margins remain good, and STDP and TDP units should be considering rate increases.

Import volumes are uncertain. Reports vary as to the quantity and timing of volumes expected from Asia and Canada. This week, at least 16 KT was booked from Europe, with arrival expected in the second half of August. This chart tracks monthly arrivals of imported volume. Data is made available after a three month delay. Monthly arrivals of Asian volumes in March, April and May were each at their highest levels since last July. Other than a brief period in May, the accumulation of imports did not have the expected effect of weakened U.S. spot prices, as the Asian volume was needed to offset lost production from extraction units and to compensate for barrels lost when the Hovensa refinery closed in February.

Price direction is uncertain. On the one hand, the volume of uncovered short positions is unclear. If consumers and/or traders are forced into the spot market to cover those positions, we could see another spike in spot prices. Unlike previous months, however, some benzene consumers are reducing, or completely eliminating consumption. Despite the forward price backwardation, traders are moving additional volumes from Asia and Europe. Along with incremental domestic production, these factors will balance the market -the question is when....

On energy, prices rebound this week largely due to non-fundamental matters. As US traders rely on news of a possible economic stimulus package in China, US companies post better-than-expected earnings. This economic climate combined with the instability in the political climate among Israel, Iran and Syria, result in a WTI price increase over $6.50 per barrel and gasoline price a 13 cpg increase. EIA fundamentals depicted a draw in both crude and gasoline inventories, the first due to high refinery operating rates and the second due to a drop in imports.

On margins, rising naphtha blend value led to further decline in all process margins on a contract price basis, but on a spot basis, extraction margins showed improvement and all toluene conversion units have positive economics.



Europe

Spot prices firmed up further during Friday the thirteenth with July deals being reported at $1350, $1370, $1390, $1400 and $1410. Monday saw the high level held, with $1410 and $1412, but prices then softened through Tuesday and Wednesday to $1390, $1380 and $1375. Comparing the 7-day moving averages, the difference between the US and European markets for July delivery has declined from $175 to $153. August, meanwhile, was caught in the slipstream, Friday seeing prices from $1,325 up to $1,360 as the backwardation slipped from $90 on Thursday to $50 on Friday, a level that was sustained through the week. August material was on average $120 higher in the USA compared to Europe. Despite higher crude on Thursday, prices for July and August were talked lower. Although we heard no reported deals, September benzene was being talked on Wednesday around $1,250. We now believe that 25-30 kt benzene is fixed for shipment to the US from ARA in four parcels with a further 5 kt from the Mediterranean.

Crackers are running at 70%-80%; one of the two crackers currently down for planned maintenance is expected to come up over the weekend. Naphtha has risen this month by 11% in dollar terms; but the benzene-naphtha differential remains well above $500. Availability has improved, with extraction units which seem to be running normally, with the unit in Antwerp most probably running, albeit at a reduced rate.

This week's charts show Western Europe's quarterly trade in benzene and derivatives with the countries of the Arabian Gulf, as reported by Eurostat (as the latest data available is for May the last quarter is incomplete). The lion's share is the import of benzene, cyclohexane and styrene monomer. Until 2010Q3 Iran, at about 20 ktpQ, was the major source of benzene. Since then Saudi Arabia has provided a similar quantity. Cyclohexane from Saudi Arabia peaked at 75 kt in 2010Q1 and has declined since then to around 45 ktpQ. From 2009Q4 to 2011Q3 imports of styrene monomer from Saudi Arabia averaged 45 ktpQ, but trade has declined since then, with only 10 kt together in April and May this year. Total exports of all benzene and derivatives from Western Europe to the Gulf amounted to about 37 kt benzene in the same period, of which almost half is accounted for by benzene to the UAE in 2009Q1.



Asia

Crude sentiment continuously firmed up during the week due to Middle East geopolitical uncertainty and reduced inventory. Brent crude price has surpassed the $106/bbl mark as of today’s closing time. Dubai crude price also trended was to over $103/bbl, in line with the increase in Brent prices. The Brent/Dubai spread is stable at around $3-$4/bbl. Naphtha price went over $873 as of late afternoon today, surpassing the $870/MT level for the first time in two months.

Calmer sentiment in the U.S. stabilized the Asian benzene market despite firm crude/naphtha price. The September FOB Korea price range has been at $1150/MT-$1165/MT and October parcel has been discussed at $1115/MT-$1135/MT FOB or backwardated by $30/MT-$40/MT. Deals were done at $1152/MT-$1165/MT FOB for September and $1122/MT FOB for October. August material has been discussed notionally over $1200/MT due to on-going high US value but no deals done. At the end of the week, the focus of spot discussions shifted to September and October barrels. Tight avails and strong support from Sinopec led to solid gains in domestic China benzene prices. Sentiment was up Rmb 400-500 as of Wednesday with deals done at Rmb 8150-8250 in the south and Rmb 8300-8400 in the east.

Crackers continue to run at reduced rates in Asia, but there was some improvement in Taiwan with the restart of FPCC and CPC crackers from trouble and scheduled turnaround. SEA operation also improved with margin recovering. Reformer operation also has been healthy. The most important factor for Asian benzene prices these days has been US value and it is still much higher than Asian prices especially for prompt parcels. Extremely tight US sentiment eased a bit this week after a deal was done at a high of $5.17/gal ($1547) last Friday, it is down to $5.00/gal mark ($1497) and September bid down to $4.00 ($1197).

On-going tight US market has pushed up arbitrage figures. Exports to the US from Korea was recorded at 47kt just for 1H July. That is already higher than June exports at 41kt. The recent delay of reformer restart and lower cracker operation in Japan led export volumes to increase to 17kt, which is already higher than 12kt of June. Japanese tightness should ease during Aug/Sep with planned styrene turnarounds.

On economics, Spread over naphtha for September benzene price base is still healthy over $277 but it would correct to $200 level when US markets normalize. Spread over toluene is down to $25/MT based on September market prices. It remains uneconomical for HDA operations and will not see any restart of HDA for short term as we reported previously.
Current Prices

Energy & Feedstocks

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Unit
RegionPeriodProductSpot LowSpot HighUnitContract LowContract HighUnitDescription
NA 11/20/2012 WTI 86.3700 86.3700 $/Bbl   
  11/20/2012 Naphtha USGC (Daily) 2.5013 2.5013 $/Gal   
  11/20/2012 ULR USGC 2.5750 2.5750 $/Gal   
  11/20/2012 ULP USGC 2.6800 2.6800 $/Gal   
  11/20/2012 Natural Gas HH LA (Daily) 3.6150 3.6150 $/MMBTU   
WE 11/20/2012 ULR R'Dam 961 961 $/MT   
  11/20/2012 ULP R'Dam 971 971 $/MT   
  11/20/2012 North Sea Dated 110 110 $/Bbl   
  11/20/2012 Naphtha CIF NWE ARA (Daily) 929 929 $/MT   
AP 11/20/2012 Dubai 110 110 $/Bbl   
  11/20/2012 Naphtha Japan Spot (Daily) 941 941 $/MT   
NA = North America, SA = South America, WE = West Europe, AP = Asia Pacific
Historical Pricing
 
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