Rising tightness for European naphtha entering November

European naphtha is set to see further tightness in November, recording multi-year highs in the physical and paper markets while lack of arbitrage interest to Asia has led to a spike in Mediterranean to NWE flows and associated freight rates.

An estimate of 289,000 mt naphtha is expected to move from the Mediterranean and Black Sea to NWE for October so far, up from 259,000 mt September and at an eight-month high, Kpler shipping data showed.

At the same time, naphtha flows from Europe to Asia have substantially declined to 727,000 mt for October so far, down from 788,000 mt in September and lowest since January 2021. The entire October volumes are set to load from Mediterranean and Black Sea ports, with Russia accounting for 427,000 mt of the total, Kpler showed. Some 381,000 mt has been booked already for November loadings, however, the beginning of maintenance of Rosneft's Tuapse refinery in November will likely contribute further to the already insufficient volumes availability out of the Black Sea.

"It is very dry, both in the North and the Mediterranean," a source said.

Naphtha flows to NWE from the Baltics also indicate a decline on the month, standing at 556,000 mt total for October to date, down from 678,000 mt total for September and lowest since June, Kpler data showed. However, returning to operations Russian refiners such as Gasprom's Astrakhan and Gazprom Neft's Omsk, could allow for more naphtha flows to the NWE market in November.

Supply from the USGC to NWE also declined in October as US market participants retain domestically more naphtha flows with the total standing at 154,000 mt for the month so far, down from 262,000 mt September and lowest since April 2021, the data showed.

On the demand front, buying interest continued on the petrochemicals front while at the end of the week, downstream ethylene and propylene November contract prices will likely be decided, also indicating naphtha's strength. An anticipated rise in ethylene demand in November will be absorbed by naphtha feedstocks as LPG alternatives retain steep premiums over naphtha equivalent.

The persistent tightness has led to a spike in pricing indications as well in the physical and paper markets, while despite the bullish sentiment in the crude oil complex, naphtha crack spread continues to rise. The spread could see even further support towards the end of the month, as commonly petrochemicals producers will buy the spread to hedge their physical exposure.

Naphtha CIF NWE front month crack spread closed at $2.79/b on Oct. 22, rising 179% since the beginning of the month, while it also stood at the highest levels assessed since Jan 21, 2016.

At the same time, naphtha CIF NWE closed at $796/mt on Oct. 25, only a few dollars shy of the $800/mt price mark, rising 11.4% since the beginning of the month, and highest since Oct. 1, 2014. Naphtha FOB Med closed at $774/mt on the day, 11.2% up since the beginning of the month.

"The market is extremely strong at the moment," another source said.

Rise in Mediterranean-UKC freight rates

Increased Med-NWE naphtha shipments could have also been influenced by the changing dynamics of clean freight markets in both the Handysize and Long Range tanker classes.

Late September saw a surge in LR2 freight indications for Mediterranean-Japan shipments -- the primary market for eastbound naphtha cargoes -- as competitive indications out of the Persian Gulf led many shipowners to make the ballast to East of Suez markets, leaving pockets of tightness for tonnage in the West.

The sharp rise experienced led to a halt in a workable arbitrage for traders as fresh cargo inquiry softened. This subsequently led to a focus on shipments within the West, with a high volume of naphtha placed on Handysize vessels in the Mediterranean to fulfil spot demand in continent markets in the North.

High volumes of fixtures in the first half of October and other support factors soon led to a sharp freight spike in Med Handysize markets, with rates for Med-UK Continent shipments, basis 30,000 mt, jumping from $15.51/mt on Oct 13 to $21.05/mt on Oct 15 – the highest level in this market since mid-May.

This spike in prices coincided with bad weather in both the Black Sea and the Med, delaying cargo discharges and tightening tonnage lists for prompt deliveries. This weather conditions caused closures of ports including Novorossiysk in the Black Sea at the start of October, whilst Malta, Scicily and Zawia closed in the Med on Oct. 14.

Owners capitalized on this disruption to compensate for the loss in earnings being driven by the record bunker prices seen recently. Delivered-Rotterdam 0.5%S marine fuel reached $600.40/mt on Oct. 18. This increase in bunker prices has also maintained a floor level price for LR2 shipments from the Med to Japan despite a long tonnage list in order to protect owner profitability.