Analysis: Europe's Dec naphtha arbitrage limited by shipowner interest; Asia firm for Jan arrivals

Singapore — Key Europe to Asia naphtha arbitrage shipments were largely stable in November compared with October, and volumes for the upcoming December-loading program could rise amid a firm Asian market in January, though shipowners favoring short haul routes could throw a spanner in the works, market participants said.

November-loading Europe to Asia naphtha arbitrage fixtures totaled 1.18 million mt, up slightly from the October-loading fixtures which totaled 1.03 million mt, according to shipping fixtures and cFlow, Platts trade-flow software.

Arbitrage volumes from Europe have been stable for the last few months, as August fixtures totaled 1.15 million mt and September was 1.095 million mt, Platts data showed.

CHARTERING FOR DEC-LOADINGS UNDERWAY

Chartering for December-loading cargoes had begun with two LR1 tankers -- the Torm Elizabeth and the La Boheme -- reportedly booked by Mercantile and Socar, respectively, for voyages from Tuapse to Japan, loading over early-December, industry sources said.

European traders could see more opportunity to sell into Asia from the January delivery cycle onwards as fresh capacity and resumption of cracker operations would lead to improved demand.

Such cargoes from Europe typically take a month to reach Asian end-users, while Asia is typically 2 million mt/month net short of naphtha and strives to cover the shortfall with imports from the West of Suez.

The Asian naphtha swaps market reflected this firming sentiment; for while front month December-January Mean of Platts Japan naphtha swap timespread rose from minus $3/mt on Nov. 17 to minus $2.50/mt on Nov. 18, the January-February MOPJ naphtha swap timespread was backwardated, rising from flat on Nov. 17 to plus 50 cents/mt on at the Nov 18 Asian close, Platts data showed.

LIGHT NAPHTHA GRADES TIGHTEN THE EUROPEAN COMPLEX

Europe's naphtha market has tightened in line with Asia, with the crack spread firming as naphtha rose faster than the climb in crude.

Naphtha CIF NWE December crack spread against the equivalent ICE Brent crude oil contract closed at minus $2.30/b on Nov.18, recovering 40 cents since Nov. 16, Platts data showed.

Strength was supported by good demand from petrochemicals for the lighter naphtha grades, while heavy naphtha grades were under further pressure from the bearish gasoline complex and abundant supply.

Blending margins, as approximated by gasoline Eurobob December swap contract against naphtha CIF NWE, dipped back into negative territory, closing at minus $1.75/mt on Nov. 18, down $1.25/mt day on day and 128% decline week on week, Platts data showed.

Bearish gasoline was also underpinned by a 2.611 million-barrel weekly increase in US stocks for the week ended Nov. 13, the latest Energy Information Administration data showed on Nov. 18.

With lockdown restrictions in Europe and the US negatively affecting mobility, and therefore gasoline demand, a possible outlet for gasoline and some heavy naphtha blendstock could be Asia, market sources said.

Petrochemical feedstock naphtha grades were expected to remain in high demand in Europe, thus the arbitrage window for December would largely depend on whether the bearish sentiment for blendstocks would suffice to bring the overall European naphtha complex low enough compared with Asia, the sources said.

The December East-West spread -- the premium of CFR Japan naphtha cargo swap over the CIF NWE naphtha swap -- was assessed at $18.50/mt, down 75 cents/mt day on day from an increase in heavy naphtha moving East, Platts data showed.

Freight economics will also remain relevant for next month's arbitrage interest, but demand contrast between the two regions will remain key.

"Termed [contractual] volumes moving East haven't changed much, the arbitrage has not been great recently, but I would move volumes East had that been the least worst of my options," a source said.

SHIPOWNERS SEEK MORE PROFITABLE ROUTES

The key Long Range II Mediterranean to Japan voyage was assessed at $1.6 million on Nov. 18, stable for the fourth consecutive day, Platts data showed.

Freight indications for LR2 Mediterranean-Japan lost the upward momentum it gained in H2 October as cargoes dried up just as rates hit their peak this month at $1.7 million over Nov. 10-12, Platts data showed.

Despite the recent lack of cargoes, shipowners will likely clamor for higher indications ex-Mediterranean in light of owners' expectations of a firmer market to come in the final month of the year heading into 2021.

Also, recent strength in the Persian Gulf and Red Sea will see shipowners favor short-haul cargoes from those regions rather than a Europe to Far East long-haul voyage, which has weaker returns.

With few attractive options in the West of Suez, much depends on how long tight tonnage persist in the Middle East and on whether owners are keen to fix East-bound naphtha shipments.

Key: NA=Naphtha, w=Worldscale, STS=Ship to Ship transfer

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