Naphtha Balances and Emerging Trades
July 24, 2020
During the past few months, we have been discussing potential opportunities in the clean tanker sector, particularly in the development of floating storage. Last week we took a closer look in the LR2 floating storage space, noting that it has likely reached its peak. According to data and forecasts on product balances, we expect LR2s to start leaving floating storage and returning to the trading fleet. Despite that, we still see some trades with the potential to become stronger, especially after data on fundamentals like product balances seem to confirm our initial assumptions. This week, we look at naphtha balances as a driver behind one of these trades.
Naphtha can be used as feedstock by refineries, but has been historically expensive, especially compared to LPGs such as propane that are preferred by refiners for the same functions. With the plunge of crude oil prices, this ceased to be the case. As analysts, we have been talking about how the naphtha trade can be altered with price changes, given the preference of refineries in the Far East to it as a feedstock. Using our own fixture data, we have seen vessels in the MR and LR sectors transporting naphtha from the West and Europe to the Far East in increasing numbers. Even in March and amid a global lockdown, we saw at least 74 fixtures to the Far East, about 34 more than January 2020. However, demand has started to taper off after a peak of 134 observed fixtures in April and alongside the increases in crude oil prices.
Despite the slowdown in fixtures, we can see that projected balances in Europe and the US for 2020 show a length even higher than 2019, and a persistent deficit in the Far East for the same time frame (Figure 1). This data points to the naphtha trade from West to East remaining relatively strong throughout the year, especially with the Middle East having shifted its short-term focus on retaining market share for crude, in contrast to their long-term goals of expanding markets for refined products and LNG. Further along the forward curve, we note that demand and supply growth for naphtha in the Middle East remains neutral, while a continuation of growth in Asian import requirements leads to more West > East flows; an overall positive for LR2 demand.
Figure 1 – Naphtha Balances in the West and East
Source: JBC Energy, McQuilling Services
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