Podcast
May 01, 2025
How has outlook shifted for LPG and naphtha as macroeconomic uncertainty looms?
Refined Products, Maritime & Shipping, Chemicals, Crude Oil, LPG, Naphtha, Fuel Oil May 01, 2025 How has outlook shifted for LPG and naphtha as macroeconomic uncertainty looms? Featuring Geraint Moody, Joel Hanley, Barbara Fernandez-pita, and Dias Kazym When the US began announcing tariffs a month ago and China hit back with reciprocal tariffs, the whole oil market complex tumbled. Despite a relative recovery in line with crude oil four weeks later, the lighter end products of the barrel are still feeling the sting from an uncertain macroeconomic environment, as outlook in the global petrochemical industry flounders. With recession fears looming, what will a world of lower demand and tighter margins mean for the consumption of the two main petrochemical feedstocks, naphtha and LPG? In this episode of the Oil Markets podcast, Joel Hanley leads a discussion with market experts Dias Kazym and Barbara Fernandez-Pita to explore the short and long-term outlook of these two products. Related: MPGC Chinese reciprocal tariffs likely to hit propane, ethane markets (Subscriber content) Naphtha CIF NWE Cargo $/mt Propane CIF NWE Large Cargo vs Naphtha CIF NWE Cargo Also on: Spotify | Apple Podcasts View Full Transcript Joel Hanley: Hello and welcome to the Oil Markets Podcast from S&P Global Commodity Insights. I'm Joel Hanley. In this episode of the podcast, we are looking at naphta and LPG. How has the tariff talk affected these two vital Light End products? In the trade intrigue unleashed in March and April by the current US administration, crude oil and certain refined products have yet to make it onto the list of tariffed commodities, although they've certainly borne the brunt of the subsequent price falls. Uncertainty around the implementation of the tariffs and what they could mean for trade flows saw crude oil values dropped nearly $15 in just one week at the start of April, with refined products naturally following suit. And while gasoline and diesel might grab the attention and all the headlines as the more famous refined products, plenty of other products have also been hit by the knock-on effects of the tariffs, including lower prices and shrinking demand all across the board. One industry that's certainly under some pressure is the petchem sector, and we shouldn't forget that oil products play a huge part in here because they supply vital feedstock in the form of naphta, and also liquefied petroleum gas, particularly propane, so of course the tariffs will have an impact and trade tensions will impact those sectors. To talk about the latest developments in the lighter end of the barrel, I'm joined by Diez Kassiem and Barbara Fernandez-Pita, two price reporters on our Light Ends team here in London. Welcome both. Nice to see you here in the studio. Let's start with naphta. It's not typically a household name as refined products go, but of course it's integral for plastics and gasoline blending and all sorts of other uses, and as a major manufacturer, China is the largest user of naphta in the world, and therefore the US-China trade tensions are bound to have a big impact at the moment. Diez Kassiem: Thank you very much, Joel, and yes indeed, naphta is quite interesting as a refined product because it can be used in two main ways, right. It can go into the gasoline blending pool, but it's also a main petrochemical feedstock, and as you rightly pointed out, the arbitrage between Europe and east, specifically Asia, China, has been the traditional flow of the naphta, and of course the imposition of tariffs, first of all by the Chinese administration on the US, OPGN NGLs, means that it opens up more room for naphta to go to China, as it normally would. However, and looking deeper in the short term, what actually happened as the direct effect of the tariffs was that naphta followed the crude oil price and it actually crashed significantly, losing around $150 per metric ton in a matter of a few days time. Subsequently, it has been recovering, but the first impact on the naphta was, of course, follow the crude oil. Joel Hanley: Yeah, and no surprise we're seeing demand destruction essentially, or at least the demand growth figures that are coming out of the IEA, the EIA, OPEC as well, they're all pulling back from their initial suggestions from the beginning of the year. Just like last year, right, we saw people halve their demand growth forecast, it felt like, and it looks like we're on track for that as well, so naphta clearly affected, given that trade flow. Barbara, are you seeing similar in the world of LPG? Barbara Fernandez-Pita: Yeah, the world of LPG has also seen a pretty strong crash in prices, really, since the tariff were introduced. Propane, as naphta, is very correlated with the crude price. The propane large cargo outright price fell by 34% from April 1st to April 9th, and even dipped below $400 per metric ton. So again, yeah, this is because markets are heavily correlated and the European propane market is interesting because the main flow of product is from the US Gulf Coast to China, and China's very reliant on US propane for its Chinese PDH plants, so that's propane dehydrogenation plants, and they've really expanded their capacity in the last couple years, and so this is going to have a pretty big impact on their ability to buy US propane and feedstocks. So just in the short term, players have retreated because the markets are in a wait-and-see mode, so liquidity is not being great. Policy uncertainty is not great, also for moving cargoes, so it's quite risky because regulations might change from one day to another, so yeah, there's been quite a lot of unsold cargoes from key terminals in the Gulf coast, and a lot of offering activity actually into Europe directly after the sanctions, because players wanted basically to avoid the China tariffs. So yeah, now things have normalized a bit more, but definitely at the start there was a bit of length. Joel Hanley: Yeah, definitely, and it seems like a lot of people got out of the market since and put all in gold, it seems to me. And you mentioned the short term there, but there is a big reliance on China's petrochemical sector on LPG, and for importing it, as I said, it's certainly the largest naphta and LPG user in the world, certainly of naphta anyway, given its plastics manufacturing. So longer term, Barbara, do you see this... What kind of impact do you see on the tariff, because it was quite a stiff tariff, that one? Barbara Fernandez-Pita: Yeah, for sure. The impact at the moment is quite uncertain. Obviously there is a fair bit of, again, uncertainty on the regulatory side, but in the recent years, China has added more than 20 million metric tons of new demand for LPG from the petrochemical industry. PDH units specifically, which produce propylene, and steam crackers that produce ethylene in China, have added 22.5 million metric tons since 2019. So yeah, these petchem players since 2023 really, they've been seeing pretty narrow margins already, margins that are even below breakeven points sometimes, and we're receiving some support from the government, but this doesn't look like it's going to be enough to offset the increased cost of 125% tariff. So already the situation, they were running at uneconomical rates, but it seems like a lot of these players are not going to have enough margin really to stomach this, and the options will be either to switch to naphta or to absorb the extra cost or basically to- Joel Hanley: Or shut up shop. Diez Kassiem: Right. Barbara Fernandez-Pita: Yeah. Joel Hanley: Yeah, so that's always an option, and we have seen waning refining margins in India now, we're seeing, and everyone always looks... They're always looking at how China responds and how China growth is and it continues to grow, but if it starts to retract, then of course the world economic situation could look rather different. And Diez, what does it mean for other markets, the petrochemical feedstocks markets, because if the flow of US product to China slows down, what does that mean for other markets? Can European naphta be a substitute to substitute that flow into the east? Diez Kassiem: That's a perfect spot-on question really, whether other markets can replace the US product, and I think the first in order would be... If you look from the perspective, as Barbara mentioned, those new PDG plants, right, from their perspective it's much easier to replace with the same feedstock from the different origin, and of course here we compete with the AG origin propane and other markets that could supply propane. What then opens up another opportunity is of course to switch the feedstock, and generally in the petrochemical industry, switching between different feedstocks is a common practice. Most usually it's done for the economic reasons. When the pricing and the discounts of one feedstock change to the other, it's quite common to see the switching, so we could expect potentially Chinese producers to switch from LPG to other feedstocks, like naphta. Now what does it mean for Europe, and I think this is where this gasoline blending demand for naphta comes in and generally refining part. Naphta is still very expensive product. Even though it lost in the price quite significantly, it's still valued very high compared to the rest of the feedstocks. In that sense, I would expect the switching to be much slower, and I think it depends on how attractive the naphta is, so it is still possible that an LPG source from AG is much cheaper than naphta source from Europe. Joel Hanley: Right. And I think as you and Barbara both said, there's still a lot of uncertainty around this, and there are pauses on certain tariffs. There seems to be more policy volatility than price volatility at the moment, if I may. So what does this mean for the petchems industry as a whole on both of these products, because there are monthly contract price settlements expected very soon for downstream petrochemical markets, and again, we talked about that volatility, maybe more policy volatility than price volatility at the moment, so people are trying to wait and see, but with this US administration, anything can happen, so how do you see it playing out? Diez Kassiem: If I may, Joel, I'll just zoom in a little bit on the European market specifically. What happened, as we mentioned, after this first crash in the naphta price, the margin for the petrochemical producer, as steam cracker operator, it actually widened significantly, clearly because your final product price stayed the same because of the contract pricing, and if your feedstock is much cheaper, which happened to naphta, your margins are much wider. Now, what the industry expects now, and this week we expect the announcement of the monthly contract prices for May of the final petrochemical derivative products, and what the industry expects is that even though the feedstock's price went down, the demand overall for the chemical industry remains relatively weak, and frankly, what tariffs actually do, they add to that uncertainty of whether the demand is likely to be sustained, because the petrochemical industry, the production of plastics, the chemicals, synthetics, automotive sector, all of that, is heavily linked to economic growth, and if the industry in general and specifically in Europe has concerns over the economic growth, well, we expect this monthly contract prices for derivative products to actually follow the price of the naphta, so the margins itself are actually to stay relatively narrow. What the overall picture looks like, the demand weakness is still there, the petrochemical industry is still oversupplied, and tariffs just add to that weakness. Joel Hanley: Yeah, I think that's a very fair comment, and we've seen the similar on the LPG side. Do you think that there's... Is there a feasible transition in the short term that people in Asia particularly might be able to switch either import location or product? Barbara Fernandez-Pita: Yeah, that's a very interesting question, I think. At the moment in China, specifically, and PDH plants, they're currently slashing their utilization rates because they're just seeing deep losses, so especially for those standalone PDH plants without downstream integration, so they're bearing really the brunt of the impact, and some of them have even suspended operations. So data from local information providers even, they place these utilization rates at around 60% now, which is down from 72% in March, and obviously this begs the question, can they switch to naphta? Obviously US flows of propane are vast, but naphta can be sourced elsewhere really, but from what we hear from market participants, the switch is actually a lot more complicated. The Chinese petrochemical industry really has been built around being able to secure propane from the US really. The US has really high production of propane. Even now, we just saw production reached an all-time high, so overall, that switching might take time. It is possible that there may be some product swapping as well with other Southeast Asian economies, but overall it does seem like it will be a longer term situation if they do manage to do so at all. Joel Hanley: Well, you think that there's probably plenty of opportunity in those large refineries in India and the Middle East that might be able to switch out. We've seen the trade map redrawn over the last three years with, you mentioned plants being designed to run on certain things, and so many European refineries are very happy with Russian Urals, and suddenly they can't have that anymore. So plenty to talk about. Plenty to keep an eye on. That trade flow map is going to be interesting. The switching, the arbitrage, it's a classic oil market. So I have to thank you both for your time on this podcast, and thank you for listening as well. And before we go, I should tell you that the annual S&P Global Commodity Insights Middle East Petroleum and Gas Conference, known as MPGC of course, will be taking place in Bahrain from the 26th to the 28th of May. I'll be chairing day one and I hope to see you there, so you'll find a helpful link in the show notes if you'd like to attend. Thank you.
