Global Cracker Margins – Playing Matador with the Naphtha Bull?

It’s no secret that the European and Asian naphtha cracker operators suffered in the days that oil exceeded $100 a barrel, as they found themselves at a significant disadvantage to those running natural gas based ethane crackers. Back in those days, high oil prices translated into high naphtha prices, which in turn ate away at downstream producer margins making naphtha an uncompetitive feedstock for chemical producers. The onset of the US Shale “revolution” compounded these issues, as domestic gas production increased and ethane price tumbled, naphtha based production offered a declining economic incentive. However, as the shale phenomena grew in size and scope its effects were felt across numerous markets, most notably the crude market, which has undergone mass price declines since mid-2014, sinking to 11 year lows in December 2015. These price declines have subsequently been passed on to naphtha, the impacts of which fundamentally altered geographic cracker margins and shifted decades old forces back towards Asia and Europe. Asia has in fact been labeled by some industry watchdogs as one of the unexpected star performers in 2015.

Once branded “uncompetitive”, Asian petrochemicals producers have earned record margins over the course of 2015, and as a product of low feedstock pricing they have stormed a market previously dominated by producers based in the Middle East and United States. Crude price declines have fueled the renaissance in naphtha based cracking, and with little sign of OPEC and non-OPEC coordinated production cuts and new Iranian capacity set to appear due to the recent sanctions relief, crude pricing is likely to perpetuate naphtha’s competitive advantage into the near future.

This newly recovered competitive advantage has seen Asian and European producers running their facilities at higher running rates so as to take advantage of these favorable margins. Whilst one would assume the market would therefore be awash with ethylene and further related downstream products, this has not been the case for a number of structural reasons including a boost in both global petrochemical and gasoline production which has aided naphtha cracker margins on their elevated path. Crackers that use naphtha as a feedstock, such as those based on Jurong Island, Singapore have enjoyed their highest profits in 10–15 years, according to industry sources. The effects of this profitability can be seen with the growth of some specialty chemical firms in the region. For instance, both Solvay and Croda opened and expanded new facilities in the area as they attempt to take full advantage of the current situation.

Perhaps most pertinently OPEC has suggested that “Naphtha is expected to be the fastest growing refined product with an average growth of 1.3% p.a. between 2014 and 2040, rising from 6.1 mb/d to 8.7 mb/d,” in its world oil outlook for 2015 and they predict that almost all of this growth will come from the Asian Pacific region. That said concerns have been raised as to the stability of this trend considering the relatively perilous situation that crude markets teeter on the edge of.

For the Specialised Products markets the current naphtha versus gas price relationship raises some interesting questions. These mostly concern the status of US shale gas projects: industry sources report that when Brent crude falls below $28 a barrel and Henry Hub gas prices exceed $4 per MMBTU shale gas based projects lose their economic competitive advantage compared to naphtha based production. Naturally, there has been some debate over whether this threatens the US shale gas phenomenon but so far, with the exception of a very brief period, the above conditions have not been reached. The other area of interest is one of demand levels. As one would expect, the transfer in buying power from producer to consumer has boosted demand for chemicals and petroleum products. This is obviously good news for our sector as with greater demand comes increased seaborne trade but as always with all things surrounding oil prices, things can change in a heartbeat which may reverse all of this in little more than a flash!

josh blog

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