Petrotahlil - Propane's discount to naphtha in northwest Europe has returned to the level it was before the onset of Covid-19, after soaring to its highest premium in over seven years during April.

The current spread between the competing petrochemical feedstocks is making naphtha an increasingly unfavourable option for those steam crackers that have the ability to adjust their slates.

Propane and naphtha can both be cracked to produce ethylene, although cracking naphtha yields higher volumes of other petrochemical products, which means it can be more attractive even when it is priced at a premium to propane. But with naphtha assessed $79.25/t above propane on 19 June and demand for co-products under downward pressure from the global economic slowdown, there is little incentive for petrochemical plants to maximise their naphtha intake at the moment.

The last time propane was at such a deep discount to naphtha in northwest Europe was on 6 March, just before the crash in crude and oil product prices.

Naphtha was significantly more attractive to petrochemical plants during the early phase of the pandemic. The collapse in naphtha demand from gasoline blenders combined with robust LPG demand pushed propane prices to a $128.25/t premium on 11 April, the widest since December 2012. LPG prices in Europe were supported at that time by domestic heating demand and by LPG's suitability for certain petrochemical processes that naphtha cannot be used for.

In the swaps market, propane values are below naphtha prices along the forward curve to the end of the year, with the July and August contracts seeing the steepest discounts, at $64/t and $49/t respectively. LPG demand typically hits a trough during the summer when its domestic use as a heating fuel is at its lowest. And so, the propane market is in contango at the moment because of lower prompt demand, while a recovery in demand from gasoline blenders helped the naphtha curve return to backwardation on 9 June.

Argus

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