Europe-Asia naphtha arbitrage volumes fall to 11-month low for Sept loadings

Tight supply decreased the flow of European arbitrage naphtha to Asia, slashing volumes for the September loading program by 20% month on month, while thin volumes are also expected for the October-loading program on strong regional demand in Europe.

September-loading Europe to Asia naphtha shipments was around 1.215 million mt, down from 1.525 million mt for August-loaded volumes, according to data from market sources and S&P Global Platts cFlow. The monthly volumes were last lower for the October 2020 loading program which amounted to around 1.19 million mt, Platts data showed.

While lower volumes were expected for the September loading program on the back of decreased demand from planned turnaround in Asia in October, traders also found it economically unviable to send arbitrage naphtha to Asia and kept cargoes to meet strong demand appetite in Europe.

The sparse volumes could continue for the October loading program, as the key spread between front month October naphtha C+F Japan cargo versus CIF NWE cargo – an indicator of arbitrage opportunity – was at $11.50/mt on Sept. 28 European close, down from $12.75/mt the week before, Platts data showed.

Chartering activity had begun for the October-loading program, with five Long Range II tankers and one Long Range I tanker heard booked to load around 460,000 mt of European naphtha in the first half of October for Asia-bound voyages, market sources said.

An uptrend in freight was also a deterrent to charterers, as LR2 Mediterranean-Japan freight had climbed to a five-month high of $2.05 million on Sept. 27, but has since edged marginally lower at $2 million on Sept. 28, Platts data showed.

A naphtha cargo from Europe typically takes around a month to arrive in North Asia via the Suez Canal, shipping sources said.

LPG upswing drives naphtha demand

Demand in Europe was mainly for petrochemical feedstock grades, as LPG alternatives were showing increased premiums in line with rising demand for heating.

Concurrently, an uptrend in natural gas prices led several domestic refiners resorting to LPG as a refinery fuel.

An anticipated further decline in outdoor weather temperatures both in Asia and in Europe will likely sustain or even exacerbate current trends, favoring in naphtha as a petrochemicals feedstock during winter months.

The front month propane swap contract closed at a $95.75/mt premium against equivalent naphtha Sept. 28, up from a $59.50/mt premium on the previous assessment, Platts data showed. This was the highest premium seen since April 21, 2020 at the heart of the pandemic.

Demand for naphtha as a petrochemical feedstock was also strong in both Asia and Europe due to positive olefin margins supporting high run rates at steam crackers.

USGC supply recovers

Asian naphtha was earlier boosted by supply tightness caused by storm damage curtailing US Gulf Coast output. Apart from Europe, North Asia's petrochemical production hub also relies on the US for arbitrage naphtha cargoes. Market participants said while Asia remains short on naphtha because of firm demand for the current November delivery cycle, the recovery in USGC output has improved supply.

Europe in turn, particularly NWE, has once again begun attracting USGC flows which have in turn contributed to a softer sentiment relatively to previous weeks. Also, traders had sent some Mediterranean and Black Sea cargoes to NWE rather than to Asia due to the uneconomical arbitrage.

The softer market was reflected in the CFR Japan naphtha physical crack against front-month ICE Brent crude futures, which fell $9.15/mt week on week to $126.825/mt on Sept. 28 Asian close, Platts data showed.

"We are short on paraffinic naphtha [In Asia], the market has bullish and bearish factors but is cooling down because the flat price is too high," said a Singapore-based naphtha trader.

The recent upswing in crude markers pushed benchmark C+F Japan naphtha $30/mt higher week on week to a near three-year high of $727.875/mt at the Sept. 28 Asian close, Platts data showed. The naphtha benchmark was last assessed higher at $728.625/mt on Oct. 5, 2018.

Europe to Asia naphtha fixtures

Key: NA= naphtha, rnr= rate not reported, cnr= charterer not reported

Source: Industry sources, S&P Global Platts cFlow