Feature: Western demand, freight volatility reduces naphtha arbitrage to Asia

Singapore — Naphtha arbitrage volumes fixed from Europe have fallen markedly on a month-on-month basis and are likely to decrease further, despite lower freight costs, as emerging demand in the West reduces flows to Asia, market sources said this week.

"May arbitrage volumes were too much, some rolled into June, and [there may be] rollover into the July delivery market too - if that is the case then the [Asian] market could be a bit bearish," a Singapore-based naphtha trader said.

"Western crackers need more naphtha than before ... but I believe there cannot be a short supply, and supply is more than demand if we include onshore inventory," a source with a South Korean naphtha end-user said.

Sentiment remained mixed in Asia as refinery run cuts have also reduced naphtha supply in the region -- a bullish factor, sources said.

Trade sources said the June-arrival arbitrage volume into Asia was estimated at 2.6 million-2.7 million mt, while July arrivals were slated to be lower as fixing activity for June-loading arbitrage cargoes has been lackluster.

Only 228,000 mt of US-origin naphtha was booked to load in May, down from 880,000 mt booked to load in April, S&P Global Platts data showed.

From Europe, ship fixtures showed the East-bound May-loading naphtha volume at 1.366 million mt, down from April-loading volumes of 1.458 million mt.

TIGHT TONNAGE

More cargoes have been fixed on Medium Range tankers rather than Long Range tankers due to a disparity in freight costs. Typically a charterer can benefit from economies of scale by using a larger vessel as the cost per ton would be lower, but LR tonnage is currently tight due to demand for floating storage.

For May-loading Europe-Asia naphtha arbitrage shipments, only seven LR tankers were booked, compared with 15 for April-loading, fixture data showed. The majority of May-loading naphtha arbitrage cargoes were booked on MR tankers, which would increase congestion at berths.

North Asian naphtha buyers typically purchase in 25,000 mt parcels, which means one LR2 tanker - which typically loads 75,000 mt of naphtha - could deliver to three buyers. However high freight rates in early May meant charterers faced $1 million in deviation costs for a three port discharge on a typical AG-Japan voyage, and this plus tight LR tonnage led charterers to utilize MR tankers instead, sources said.

NAPHTHA EXPORTS EASE

The main driver of increased naphtha demand in Europe and the US was road transport returning to pre-coronavirus pandemic levels as lockdown restrictions eased, with the rise in gasoline demand having a flow-on effect on its key blendstock, naphtha.

"Countries like Italy, Spain and Israel easing lockdowns has led to a demand spike in gasoline -- my friends and relatives have been complaining about crazy traffic jams," a Europe-based market source said.

Gasoline inventories in the Amsterdam-Rotterdam-Antwerp trading hub increased 7.5% on the week to Wednesday to 1.388 million mt, while naphtha stocks rose 5.8% to 471,000 mt, Insights Global data showed. Although the rise in naphtha inventories was milder, potentially due to domestic petrochemical producers absorbing feedstock naphtha grades, concerns remained regarding a persistent product oversupply, sources said.

European traders said selling domestically was the most economically rational outlet for naphtha. However, more volumes could start moving East in June as freight has become more competitive, sources said.

"The East/West spread has narrowed [but even though] freight has come down, the arbitrage volumes are not as much as last month," a Singapore-based source with an end-user said.

The spread between the June CFR Japan and CIF NWE naphtha assessments stood at $21.25/mt at Tuesday's European close, and brokers pegged the spread wider at $21.75/mt in mid-morning trading in Asia Wednesday. The spread hit a record high $67.50/mt on April 22, Platts data showed.

The key LR2 Mediterranean-Japan freight has tumbled from the record high of $9 million on April 27 to $2.7 million on Tuesday, Platts data showed.

Naphtha arbitrage fixtures loading in May:

Naphtha arbitrage fixtures loading in June:

(Key: Tbn=to be nominated, rnr=rate not reported, cnr=charterer not reported, TA=Trans Atlantic, Own Prog=Own Program)

Data from: Industry sources, S&P Global Platts cFlow