Feature: Hungry Asian naphtha market sees surge in US arbitrage cargoes

Record levels of US Gulf Coast naphtha made its way to Asia's shores over December and January to feed North Asia's urgent appetite for the feedstock amid tight supplies.

Prior to late 2019, US exports of naphtha to North Asia hovered around 450,000 mt each month, sources said. Arrivals of the US Naphtha into North Asia rose to around 600,000 mt in December 2019, and a similar total was slated for January 2020, according to industry sources and data from cFlow, Platts tradeflow software.

"Incremental barrels of Western arbitrage naphtha have been from the US in the past couple of months -- the total was above the 500,000 mt level," said a Singapore-based naphtha trader.

The surge came earlier than expected, as market participants anticipated the rise of US arbitrage volumes in the second half of 2020.

High freight rates are an obstacle for traders seeking to arbitrage naphtha cargoes, but are also a reflection of keen interest for the voyage.

USGC to Northeast Asia freight on both LR1 and MR tankers are at record highs since S&P Global Platts began assessing the route on June 1, 2016. The USGC-Northeast Asia freight on LR1 was last assessed at a lump sum of $3.1 million and $2.2 million for MR Tuesday, Platts data showed. Such voyages typically take 33-35 days, or could see delays due to fog on USGC.

Strong demand to move naphtha into North Asia pushed up freight. Comparatively on October 1, the timing from which charterers would have begun to work cargo arrivals for December into North Asia, the freight was at $1.7 million for an LR1 and $1.15 million for an MR, according to Platts data.

FEW OPTIONS FOR NET-SHORT ASIAN MARKET

In addition to Saudi Aramco naphtha exports not making a full recovery to levels prior to September 2019 when a crude processing facility in Abqaiq, Saudi Arabia was hit, refinery turnarounds in the Middle East further constrained supply flowing out of the Arab Gulf, sources said.

Further pressuring the Asian market, the European naphtha market was tight from late 2019 into January 2020, limiting opportunities for traders to find barrels to ship across the Suez to the Far East. The spread between the March CFR Japan naphtha and CIF NWE naphtha assessments narrowed by 25 cents/b day on day to $13/mt at Tuesday's Asian close -- almost half from the year's high of $21.25/mt on January 3, Platts data showed.

The arbitrage of European cargoes may not be economically viable on paper, however some traders have paid up to bring in supplies to Asia due to either their own refinery requirements or term requirements, sources said.

"West arbitrage volume for January arrival [in North Asia] was 2 million mt, of which the US volume is about 600,000 mt, [which consists] 100,000-200,000 mt of heavy naphtha and the incremental volumes are light naphtha," said a trader with a North Asian end-user.

AMPLE SUPPLY OF US NAPHTHA

The impact of Tier 3 sulfur-reducing regulations for gasoline was felt in the USGC naphtha market as regulations went into full effect in 2020. Although the regulations were placed by the US Energy Information Administration in January 2017, three-year waivers were allowed for about 30 refiners. Those waivers expired at the start of this year, putting pressure on USGC naphtha.

USGC market sources said naphtha barrels containing more than 10 parts per million of sulfur were seeing a discount of more than 10 cents/gal compared to their sweeter counterparts.

With sour barrels sidelined from the gasoline blending pool in the US, market players in the USGC were looking to export as many barrels as they can, and Asia was a welcoming home.

"Sour naphtha barrels will go to whoever will take them," a USGC market source said.

Market sources in the US anticipated higher exports of naphtha in 2020, as Tier 3 sulfur-reducing regulations are expected to put downward pressure on differentials for sour naphtha barrels.

Platts assessed light straight run naphtha barges at February natural gasoline plus 3.5 cents/gal Tuesday.

HIGH FREIGHT, EUROPEAN ARBITRAGE

Shipping inquiries to send USGC naphtha sailing East persisted as US market players continued to search for outlets for their product. Demand to export USGC naphtha is expected to increase as the region transitions to spring and summer gasoline blending.

Yet, the Asian naphtha market may not see these levels continue should the US suppliers see better margins selling into other markets.

"US naphtha is commercial, it sells to which ever gives the best value between gasoline, petrochemicals, Asia or Europe for light naphtha," said a trader with a North Asian end-user.

In addition, freight for Europe to Asia has decreased. The LR2 Mediterranean-Japan freight has dropped $900,000 since January 2 to $2.2 million Tuesday, showed Platts data.

"Lower freight is a bearish factor for the market, now with the freight rate low, traders have more chance to bring in [Europe] cargoes," said a North Asian end-user source.