July-loading Europe to Asia naphtha arbitrage falls to 1.51 mil mt, boosts market strength

Europe's tight naphtha supply for the July-loading program has curbed outflows into Asia as volumes drop 12.21% month on month to 1.51 million mt, fueling substantially bullish sentiment in the naphtha markets.

In comparison, Western naphtha arbitraged from Europe, the Mediterranean and North Africa into Asia marked a near two-year high for June loading cargoes of around 1.72 million mt, Platts data showed. Furthermore, tankers carrying around 230,000 mt of naphtha had slipped on delays -- from loading in June to July.

Typically, more than 90% of Europe's naphtha arbitraged to Asia move from Mediterranean and Black sea ports; with volumes sailing into Northwest Europe when Asian interests wane.

An estimated 160,000 mt of naphtha from Mediterranean and Black sea ports are destined for NWE to-date in July, higher by 58,000 mt than in June, statistics from data intelligence firm Kpler showed.

Meanwhile, chartering activity for the August-loading program has started, with four product tankers booked to load around 300,000 mt of naphtha loading in the first decade of August with voyage options to Japan, sources said.

Highlighting the tepid interest in the arbitrage, freight for the key LR2 Mediterranean-Japan voyage was assessed at a two-month low of $1.575 million mt on July 21-22, a level last seen on May 18, Platts data showed.

High LPG prices boost naphtha

Uncommon for summer, feedstock naphtha grades were supported by strong petrochemical demand and insufficient alternative feedstock, LPG.

Around 341,000 mt of US LPG were slated to sail to Europe to-date in July, below June's 465,000 mt, the Kpler data showed.

Front-month August propane swap closed at a $41.75/mt discount against the naphtha swap, down from a $30/mt discount a week ago, within the naphtha maximization range.

"Propane doesn't seem to be pushing back into cracking at the moment," a source said.

Tight naphtha supply in Europe

US' naphtha exports to Europe stood at 265,000 mt to-date in July, down from 397,000 mt in June, Kpler data showed, as US refinery rates lag growing feedstocks demand particularly for arbitrage to Europe.

Naphtha supply from Russia, a major exporter to Europe, is also limited given lower runs and extended maintenance at several refineries like Achinsk, Kuybishev, Taneco, Astrakhan and Surgut.

Russia is set to export 509,000 mt of naphtha to Europe so far in July, lesser than pre-pandemic exports of 640,000 mt in July 2019. Also, European refinery runs have not returned to pre-pandemic levels.

The profound tightness was demonstrated in the multi-year high crack spread. Front-month August naphtha CIF NWE crack was assessed up 95 cents/b week on week at $1.40/b at the European close on July 22, a level last higher on Nov. 28, 2017 when it was $1.55/b, Platts data showed.

European naphtha is to continue seeing demand-led support amid tight downstream olefins markets and restocking for August towards end-July.

Gasoline blending demand has been supportive in Europe, so the region will likely seek to retain naphtha to satisfy domestic consumption.

Asian naphtha demand rises

Earlier, thin olefin margins had Asian petrochemical makers mulling lower run rates, while some crackers were facing technical issues following a restart, or start up, weighing on demand expectations. Furthermore, Asia was slated to receive record high volumes of US arbitrage naphtha in June and July, leaving market participants in no hurry to book European shipments.

Since, a recovery in olefin margins, the ramp up of those crackers to full operation levels and unviable economics for the use of LPG as an alternative feedstock had Asia's steam crackers keeping naphtha in demand.

Reflecting the firmer market was the uptrend for CFR Japan naphtha physical crack against front month ICE Brent crude futures, which was assessed at $127.625/mt at the July 22 Asian close, up $5.775/mt day on day and $42.05/mt month on month, Platts data showed. In comparison, the physical crack had averaged $90.58/mt in May and $94/mt in June.

Trade sources said the lighter arbitrage inflow meant fewer cargoes rolling over from H2 August delivery into the current H1 September delivery cycle. This may lead to stronger demand from Asia pulling in European cargoes, which has supported the current East-West spread amid the upswing in Europe. Front-month August East-West spread -- the premium of the CFR Japan naphtha cargo swap over the CIF NWE equivalent -- was assessed at $13/mt at the July 22 European close, down 50 cents/mt week on week, Platts data showed.

Europe to Asia naphtha shipments:

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