Tight supplies on run cuts drive upswing in Europe, Asia naphtha markets

Singapore — Refinery run cuts have slashed naphtha supply in both Asia and Europe, and rebounding petrochemical production and gasoline demand in Europe have led to upswings in both regions in the week started June 21.

In the European naphtha market, the naphtha CIF NWE crack spread against ICE Brent crude oil futures closed at minus $1/mt June 23, narrowing from minus $1.55/mt June 22, the highest since January 2018, S&P Global Platts data showed.

The CFR Japan naphtha physical crack against front-month ICE Brent crude futures was over a four-month high at $70/mt at the June 23 Asian close, wider by $3.325/mt day on day, Platts data showed. The crack was last wider on February 13 at $76.925/mt, showed Platts data.

Asia is typically net short of around 2 million mt of naphtha each month, and relies on Western arbitrage cargoes to fill the gap, particularly at a time when refinery run cuts reduced exports from the key Middle East and India regions, and naphtha-fed steam crackers received less naphtha from domestic refiners too, sources said.

LIMITED ARBITRAGE TO ASIA

Western arbitrage arrival volumes were high in May and June, but has decreased from July delivery cycle onward due to high freight and limited supply from refiners, sources said.

However, freight for the key LR2 Mediterranean to Japan voyage continued to fall, and there could be an opportunity window for more arbitrage naphtha cargoes to head East, provided the recent European naphtha price rally would not offset the economic benefits of a lower shipment cost. The freight for this key route was assessed at 2 million on June 23, down $100,000 day on day and the lowest seen in 2020 so far, Platts data showed.

Nevertheless, the strength in European naphtha prices have put pressure on arbitrage volumes East, with the July East-West spread – the premium of the CFR Japan naphtha cargo swap over its CIF NWE equivalent – assessed at $14/mt on June 23, down 50 cents day on day at the European close, Platts data showed.

Fewer cargoes available from Europe was a key factor boosting naphtha prices in the East of Suez, sources said.

"The first stage we saw for Europe improvement is quite a few ships floating with naphtha started to clear up last month, which went to gasoline and petrochemicals, so it cleared up the surplus and the contango disappeared," said a Singapore-based naphtha trader.

"Demand continues to improve from gasoline blending, steam crackers, the economy, and suddenly the market wants naphtha, but refineries had cut runs [earlier]," the source added.

Light naphtha grades were tight in supply in Asia from refinery run cuts, and steam cracker run rates remain high due to favorable earnings on olefins, particularly ethylene, sources said.

The spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical stood at $443.75/mt at the June 23 Asian close, Platts data showed. This was well above the typical breakeven spread of $350/mt for non-integrated producers.

"Many Far Eastern refiners and economies are slowly recovering, the Japanese economy is back to precoronavirus pandemic times," another Europe-based source said.

DOWNSTREAM STRENGTH IN EUROPE

In the European naphtha market, outright prices spiked June 23, with the assessed value at $392.50/mt up $20.50/mt day on day and the highest since March 5, Platts data showed. However, the recent strength in fundamentals could be better reflected looking at the relative value change against naphtha's associated and competitive markets.

The propane to naphtha spread – the differential between Platts Naphtha CIF NWE July swap and Platts Propane CIF NWE Large Cargo July swap – was assessed at minus $73.50/mt on June 23, wider $11/mt day on day. Propane's discount was well below petrochemicals producers' typical $60/mt discount threshold for switching from naphtha to propane as a cheaper feedstock. This could be the case for July for some as margins for ethylene, mainly produced by cracking naphtha or propane, came under severe pressure on increasing naphtha costs, sources said.

However, not all producers retain the cracking capacity of switching to the feedstock of preference, accounting as well for those that did not benefit from low naphtha prices at the peak of the pandemic. Additionally, demand for food packaging plastics, where ethylene is used, is expected to remain strong, while plastics demand for the automotive industry is seen on a slow road of recovery, therefore potentially showing naphtha feedstock grades supporting sources.

Demand for gasoline-blending naphtha grades, on the other hand, could only rise in the near term, sources said.

Tighter supply across Europe could have further benefited naphtha fundamentals. Although refining margins were still not that strong on increased production costs despite the crack spread rally, they were arguably higher than those for producing distillates, such as diesel and jet fuel, according to sources. This could have resulted in refiners that reduced runs to have at the same time increased light ends production, such as naphtha and gasoline, against middle distillates.