Naphtha East/West spread hits record high at $42/mt as Europe market reels from coronavirus

Singapore — The Europe-Asia naphtha spread hit a record high Tuesday as the European oil and petrochemical complex reeled from the impact of the coronavirus pandemic, market sources said.

The premium of the April CFR Japan naphtha to CIF NWE naphtha assessment surged 21.7% day on day to a record high $42/mt at Tuesday's Asian close, the highest since S&P Global Platts launched the assessment on October 1, 2014.

Despite weakened demand for naphtha in Asia, sources said it was still holding stronger than in Europe.

Demand for naphtha in Europe was extremely thin for both petrochemical demand for open-specification naphtha and gasoline blending demand for light virgin naphtha; the key CIF NWE naphtha assessment hit a 17-year low on Monday. Asian demand is a key driver for the open specification European naphtha grades, while the glut of gasoline barrels in both regions has eroded demand for blending grades.

Some European naphtha traders were considering stockpiling cheap naphtha in anticipation of a market reversal in the near term. However, many others were worried about the inability to react to market swings if inventory capacity was already maximized, and were unwilling to buy despite the heavily discounted prices, sources said.

EAST-WEST ARBITRAGE TO CONTINUE

Other traders suggested that the inflated freight rates between Europe and Asia was the key reason for a steeply widened East-West differential, as they may be working out European prices as a netback from their projected price in Asia. Also, with the market in contango structure, future prices were expected to be higher than current levels, and traders could turn a profit on their cargo during the period it would be en route.

"The freight is also going up even though the East/West pricing is wider and if the cargo stays in the West they are losing more money, so even though the Asian naphtha market is well supplied for H2 April and H1 May, the trader's choice is to bring it here and lose less money," a Singapore-based naphtha trader said.

While the wide East/West naphtha spread could attract more European cargoes to flow into North Asia, traders said it was a case of where they could send cargoes to reduce losses and rising freight costs was curtailing the arbitrage window.

The key LR2 Mediterranean-Japan voyage was assessed at $3.3 million at Tuesday's European close, up $400,000 week on week, Platts data showed. At such a level, freight costs may outstrip the East/West spread, which had shrunk by Tuesday's European close to $34/mt, Platts data showed.

Cargo flows were expected to continue from Europe to Asia even with negative economics, as many had contractual obligations to export naphtha East.

Supply of naphtha in Asia was also expected to lengthen in Q2 – the time when European naphtha arbitrage cargoes would arrive in Asia -- due to the return of Middle East refineries from turnarounds increasing availability and the start of North Asian steam cracker turnaround season decreasing demand, sources said.