Analysis: Tight supply in Europe squeezes Oct naphtha arbitrage volumes to Asia

Singapore — Europe-Asia arbitrage naphtha shipments were expected to be light for the October-loading program for as fewer cargoes were available for export due to tight supply amid stronger demand, particularly for the feedstock grades, while freight economics remain unfavorable.

Shipping fixtures showed 890,000 mt of European naphtha was booked for Oct. 5-24 loading voyages to the Far East, impacted by an earlier upswing in freight costs - cargoes typically take around a month to arrive.

While a few more fixtures were expected for October, the total volume may be similar to the September loading program of 1.095 million mt, market sources said.

Asia is typically 2 million/mt month net short of naphtha and strives to cover the shortfall with imports from the West of Suez, but the shortfall is expected to be greater than usual in October as refinery run cuts reduce regional supply.

For the November delivery cycle, ship fixtures showed 414,000 mt of US-naphtha due, which is higher than usual and may help ease some of the shortfall in European shipments.

However, regional demand was robust as positive olefins margins keep naphtha-fed steam crackers running at full or close to full load, sources said.

CLOSED ARBITRAGE

European product holders were not showing interest in moving more volumes East on arbitrage for October, while Black Sea October loadings ex-Tuapse were down 30% on month at 210,000 mt.

"The [Europe-Asia naphtha] arbitrage is closed for October, the freight is still too high," a source said.

The key Mediterranean-Japan voyage was assessed stable day on day at $1.8 million, or $22.50/mt, Oct. 6, after touching a multi-month high of $2.475 million over Sept. 15-22, S&P Global Platts data showed.

The spread between the November CFR Japan naphtha and CIF NWE naphtha assessments fell 50 cents/mt day on day to $18/mt at the Oct. 6 Asian close and was also at $18/mt at the European close, down 50 cents on the day, Platts data showed. The spread has averaged $18.167/mt over the past week, remaining largely stable.

With the freight cost higher than the East-West spread, traders faced difficulties making an economical sale of European naphtha to Asia.

A North Asian cracker operator said he does not expect current firm naphtha prices in Asia to attract additional Western arbitrage flows due to the high freight cost.

European supply and exports were also being limited by the use of naphtha in domestic crackers, and by demand for European naphtha as a gasoline blendstock for exports to West Africa and the US.

FIRM EUROPE, ASIA MARKETS

Asia's naphtha market is being supported by robust demand from steam crackers and tight supply from the limited Western arbitrage inflow, sources said.

Most Western naphtha arrivals in Asia are heavy grades, with typically around minimum 65% paraffin content. In order to improve olefin production, steam crackers prefer to use naphtha with a higher paraffin content of 70% or more, which is in limited supply.

Reflecting market strength, the CFR Japan naphtha physical crack spread against front-month ICE Brent crude futures has surpassed $80/mt since Sept. 8, and was last assessed up $1.625/mt day on day at $92.125/mt at the Asian close Oct. 6, Platts data showed. This is a near 10-month high; the physical spread was last higher on Dec. 12, 2019, at $94.85/mt, Platts data showed.

In Europe, naphtha flat prices rose 6.97% week on week to close at $395/mt Oct. 6. As a straight run refined product, naphtha tracked the volatility in the crude oil complex which provided an upside, largely offsetting any gains for the East-West differential associated with declining freight.

However, the tightness of the market was reflected in a rally in crack spreads and a steepening backwardated structure at the prompt of the forward curve. The naphtha CIF NWE crack spread against ICE Brent crude oil December futures averaged 43 cents/b on week, a twofold increase, to close at 60 cents/b on Oct. 6. The crack had just reached a near three-year high of 90 cents/b on Oct. 5.

The relationship between naphtha CIF NWE October and November swaps was seen at $4/mt on the day, up from minus $1.50/mt the week before, and at the highest since Aug. 28.

Tight European supply was due to run rate minimization and demand for blendstock and feedstock grades, which is uncommon for the season, as gasoline has entered winter specification when there is higher butane participation in the pool. However naphtha blendstocks were being drawn into the pool on increased gasoline export interest to West Africa, and also the US.

However, sources said the trend was not expected to continue as requirements were now largely covered for West Africa.

Petrochemicals producers supported more naphtha feedstock grades for cracking on a narrowing propane-naphtha differential. The naphtha CIF NWE November swap contract against propane CIF NWE equivalent was seen at $26.25/mt Oct. 6, down 1.25% on week.

Europe-Asia naphtha fixtures for October:

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