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Resilient LPG and naphtha to find continued support in 2021

European naphtha and LPG markets look set to remain relatively resilient into 2021 as cracking and heating demand continue to provide support, in contrast with much of the rest of the oil complex which has suffered through the coronavirus pandemic.

European naphtha market dynamics will remain closely tied to developments in the global battle against the coronavirus pandemic. While other oil products such as gasoline and jet crashed, there has been steady petrochemicals demand. Demand for PPE and consumer plastics has been robust, supporting naphtha as a feedstocks. Demand from European crackers, which use naphtha and LPG as a building block for ethylene and propylene production, should be steady. While some fluctuations are expected, a large part of the region’s cracking capacity is configured to crack naphtha.

The firmness is expected to remain at least until summer 2021, particularly as naphtha is pricing at more favorable levels against competing feedstock LPG.

Naphtha as a blendstock for gasoline will remain under pressure until lockdown restrictions are lifted. This is evident when approximating blending margins.

In the domestic market, the extent to which refiners will maintain the low run rates seen through much of 2020 will determine naphtha supply support.

Aside from coronavirus-induced changes, some variability could be seen in demand from the largest European export market, Asia, as end-users have been progressively seeking higher paraffinic content, a tighter specification.
LPG to remain largely unaffected by pandemic

Market sources expect LPG will likely experience some degree of strength next year, bolstered by both supply and demand perspectives. As a relatively clean fuel, LPG could find further demand support as countries in Europe implement initiatives in line with obligations under the Paris Agreement.

Whether or not lower gasoline demand persists into 2021, LPG will likely experience the same resilience seen in 2020, particularly in North Africa for butane and Germany for propane.

While much of the world and wider oil complex was upended by coronavirus, demand for LPG has largely been subject to the same seasonal demand trends seen in any other year. This has been a stabilizing factor and is expected to continue.

Commonly, in the summer LPG loses much of its demand as a domestic heating fuel, typically lowering the price versus naphtha and positioning LPG as a more competitive feedstock. In the winter, the opposite often occurs.

Butane demand is expected to remain muted for gasoline blending purposes in line with naphtha on lower expected travel. However, its utilization for commercial purposes particularly in North African markets, commonly drawing directly from Mediterranean and some NWE volumes, should support the market.

From a supply perspective, an uptick in US imports could likely offset lower refinery output in Europe.
Refiners opting for investment in renewables production

2020 was a year of hard choices for European refiners. For many, deteriorating margins and demand for refined oil products in the wake of COVID-19, accelerated the shift to biofuel and hydrogen technologies, whose development will span the next few years.

The most high profile move will see France get a second biorefinery by 2024 after oil major Total decided to convert its Grandpuits plant to produce renewable diesel and bioplastics.

More news on conversions could follow next year, after Eni said it may speed up the conversion plan for some of its traditional refineries in Italy. Spain’s Repsol meanwhile aims to nearly double sustainable biofuel production by 2025, part of which will come from a new biofuel plant at Cartagena, which will be operational in 2023, producing biodiesel, biojet, bionaphtha and biopropane.

Further north, Swedish Preem abandoned, just before getting government approval, the residue oil conversion complex project at Lysekil in favor of a large-scale production of renewable fuels, while Finland’s Neste will transform its Porvoo refinery operations to co-processing renewable and circular raw materials.

In the short-term, the UK’s Humber refinery aims to increase next year four-fold its renewable diesel capacity. Next year is also likely to see further updates on Croatia’s Sisak potential conversion to bioethanol production. Meanwhile, a number of German plants, including Heide, Lingen and Rheinland are turning to green hydrogen. With margins remaining in the doldrums, 2021 could see more names added to this list.

Many global financial institutions increasingly reduce funding allocations to E&P and other carbon-based operations while at the same time accelerating investment in renewable energy and progressively seeking to obtain a more favorable ESG rating. The extent to which bionaphtha and biopropane, still niche and scattered markets, will be developed to become competitively priced against their fossil fuels equivalents could transform supply and demand dynamics.
Source: Platts

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