Softening Asia sentiment weighs on March-loading European naphtha arbitrage

Singapore — March-loading Europe to Asia naphtha arbitrage volumes are slated to be lower than February loadings, as prompt length in Europe failed to improve the East-West spread, an analysis by S&P Global Platts showed.

Typically, a build up in length in the Northwest European naphtha market coupled with weakening domestic petrochemicals demand could be a push factor for some barrels to move on arbitrage East, however, European fundamentals in April are anticipated stronger, and a rise in LPG feedstock usage by steam crackers had begun to weigh on the Asian market.

Fixtures for Europe to Asia naphtha arbitrage totaled 1.237 million mt for March 2-25 loadings, lower than 1.405 million mt spotted for the shortest month of the year, February, data from market sources and Platts' trade-flow software, cFlow showed.

Although Western arbitrage was lower month on month, the Asian naphtha end-users have begun to use LPG as an alternative feedstock, which has weighed on trading sentiment regionally.

Asia's steam crackers typically begin to use LPG as an alternative feedstock to naphtha when LPG is at least $50/mt lower, however wide olefin margins have helped steam-crackers afford the use of LPG even though the spread had not gone below minus $50/mt, sources said.

Due to softer sentiment, front month April-May Mean of Platts Japan naphtha swap spread was assessed at $6.75/mt on March 18, down 25 cents/mt on the day, Platts data showed.

On the coattails of the further downturn led by the European naphtha complex, brokers pegged the April-May MOPJ naphtha swap spread lower, at $5/mt in mid-morning trading March 18.

Europe weaker on LPG usage, naphtha resupply

The heightened supply arriving to NWE over March was due to a combination of flows from the US but also the Mediterranean and Black Sea – with the latter largely associated with weak arbitrage interest East.

On the petrochemicals demand side, European steam crackers can use LPG in up to 30-40% of feedstock when pricing is favorable -- as it is presently -- compared to naphtha. The April CIF NWE propane swap contract against the equivalent naphtha closed at $66.75/mt on March 17, and has been below the switching point of minus $50-$60/mt where LPG utilization is maximized, Platts data showed.

This has resulted in a collapse in naphtha crack spread and market paper structure, which unusually did not significantly bolster the economics for exports to the East on paper due to weakening sentiment in Asia.

The April CIF NWE crack spread declined 78% week-on-week to minus $2.50/b on March 17 -– a low since Dec. 4, 2020, Platts data showed.

The impact was minimally reflected in the front-month April East-West spread -- the premium of the CFR Japan naphtha cargo swap over the CIF NWE equivalent –- which was assessed at $13/mt, down 75 cents/mt week-on-week, Platts data showed. Comparatively, the average over Feb. 17 to March 17 standing at $12.04/mt.

East-bound arbitrage remains open

Nevertheless, some market participants stressed that cash differentials stood at levels sufficient to compensate for the low East-West spread.

"The Eastern arbitrage is working it is just not wide open," a Europe-based source said.

Reflecting soft sentiment in the European naphtha market, the CIF NWE cash differential moved to a negative basis over the previous week and was last assessed at minus $3/mt on March 17, a decrease of $1.25/mt week on week, Platts data showed.

Meanwhile in Asia, CFR Japan cash differential had stayed relatively rangebound between $11.50-$13.00/mt since March 1, and was last assessed at $13/mt on March 17, stable day on day, Platts data showed. Traders also faced a largely stable freight cost of late, as the key LR2 Mediterranean to Japan voyage was assessed at $1.95 million mt over March 5-16, and edged up to $1.975 million on March 17, Platts data showed.