Naphtha Cracks: Deeply Negative Outlook Despite Summer Strength

Naphtha cracks to stay deeply negative

While the naphtha market has strengthened over the summer, prompt cracks still remain deeply in negative territory and well below historic norms. There are several reasons driving the broader weakness in the naphtha market. Firstly, a weak propane market has ensured that propane is the favoured feedstock for the petrochemical industry, with propane trading at more than a US$100/t discount to naphtha in northwest Europe. Secondly, downstream demand has been weaker, with cracker margins in both Asia and Europe not great.

In Europe, the chemical sector has suffered significantly because of higher costs and weaker demand. As a result, chemical production over the first half of 2023 was down 12.3% year-on-year according to the European Chemical Industry Council (Cefic). Cefic numbers show that this weaker output from the sector is not isolated to Europe. South Korea and Japan also saw large declines over the first half of 2023, with output falling by 18.4% and 7.2% YoY respectively.

Despite this, we expect naphtha cracks will see seasonal strength as we move into the northern hemisphere winter with increased usage amongst the petrochemical industry as propane’s discount to naphtha narrows, making propane a less attractive feedstock for the industry. However, whilst we see strength in cracks, we expect that they will remain firmly in negative territory and below historic norms through the northern hemisphere winter, given weak downstream demand.

 

 

Chemicals production still under pressure (YoY % change)

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