European naphtha volatility weighs on recovery of East-West spread

Singapore — The spike in European naphtha values on July 21 crushed gains in the key East-West naphtha spread during Asian trade, with the spread between front month August CFR Japan naphtha and CIF NWE naphtha assessments retracting to previous week's levels. At the European close, the differential was assessed at $13.25/mt, up a sluggish 1.9% on the week.

During Asian trade on July 21, the spread had widened 25% week on week to close at $14.25/mt, from $11.50/mt on July 14, Platts data showed. The front month East-West spread was last wider on June 23 at $15/mt.

Over the last week, the spread was supported amid weakness in the European naphtha market, and a resurgence in Asia as buying for the current H1 September trading cycle began.

Chartering for July-loading Europe-Asia shipments had totaled 1.515 million mt, while fixtures for August-loading cargoes had begun with as much as 220,000 mt of naphtha placed on subjects thus far, shipping sources said.

Although weakening fundamentals are prevalent in the European market, the most noticeable feature was increased volatility, mainly associated with uncertainty in near term demand. Indicatively, CIF NWE naphtha averaged $371.70/mt on the week, moving downward with standard deviation -- the measure of values dispersion around the mean -- standing at 8.9, Platts data showed.

On July 21, news regarding vaccine development that could help combat the coronavirus and the EU announcement of the release of a stimulus package to help the economy, pushed the crude oil market to rally, leading the straight run CIF NWE naphtha to close at $387.25/mt, up $21.75/mt on the day.

FRESH ACTIVITY IN ASIA RALLIES NAPHTHA

Trading for H1 September delivery began slightly later. Instead of kicking off with the month roll on July 15, naphtha end-users only emerged on July 21 with buy tenders for H1 September-delivery, market sources said.

This boosted the backwardation in the derivative market, as front month August/September MOPJ naphtha swap timespread widened to $3.50/mt at the July 21 Asian close, after sliding to a five-week low of $2.50/mt at the July 20 Asian close, Platts data showed.

The paper market at the European close was also stronger, however, with the equivalent naphtha CIF NWE timespread closing at a backwardation of $5.50/mt, stronger at the prompt by $1.75/mt on the day, Platts data showed.

"We seemed strong on the paper today at least," a European market source said.

BEARISH FACTORS SHADOW SENTIMENT

Naphtha end-users in Asia had been in no hurry to secure cargoes, given the longer supply and lower demand for this delivery cycle compared with August, sources said.

Lower demand was expected from the turnaround of four naphtha-fed steam crackers -- SP Chemical Taixing, Formosa Mailiao, Idemitsu Tokuyama, and YNCC Yeochon -- from end-July to October, market sources said. Moreover, the planned restart of Lotte Chemical's Daesan cracker has been moved back to mid-November, from October, Platts reported previously. The company had initially planned to restart the cracker in September.

In addition to the planned turnarounds, steam crackers had secured LPG feedstock earlier when it was heavily discounted to naphtha, and would replace some naphtha feedstock with LPG, market sources said.

They added that Asia's demand appetite stayed firm on healthy olefin margins, however, LPG has a higher olefin yield than naphtha as a cracker feedstock. The spread between CFR Northeast Asia ethylene and physical CFR Japan naphtha was $406.875/mt on July 21, down $17.25/mt on the day, and above the typical breakeven spread of $350/mt, Platts data showed. And the spread between FOB Korea propylene and naphtha C+F Japan cargo assessments was $391.875/mt at the July 21 Asian close, down $17.25/mt on the day, Platts data showed. The typical breakeven for propylene to naphtha is around $250/mt, market sources said.

Olefin margins in Europe were also positive, but this could not necessarily be attributed to favorable naphtha pricing even as petrochemical producers sought to maximize the use of propane as feedstock, market sources said.

"Demand from petrochemical producers is not that strong at the moment," another European source said.

The propane CIF NWE August contract against the naphtha equivalent was at an average discount of $58.90/mt to naphtha on the week, rangebound to the threshold discount of $60/mt commonly used by industry professionals as a benchmark to switch to propane as feedstock, Platts data showed.

Blending economics on the other hand were also unfavorable due to a tight gasoline-naphtha spread, as the heavier naphtha grades, which are usually treated in catalytic reformers to become suitable gasoline components, were being blended with the lighter ones resulting in open specification grades, that have wider applications.

This weaker European outlook could open the arbitrage window to the East with many suggesting that European naphtha is overvalued and has to be corrected further downwards, with volatility, however, remaining a key concern, market sources said.