European naphtha to see more blending demand as cracking interest fades

New York — European demand for cracking grades of naphtha is set to decline, which could see more material sent to the East, while re-emerging gasoline blending activity could provide ongoing support for the complex, which has been strong of late.

With crude oil flat prices sharply higher in recent sessions, CIF NWE naphtha was assessed at $593.25/mt on Feb. 24, its highest since April 24, 2019, according to S&P Global Platts data.

Meanwhile, the front-month March East-West -- the spread between the CFR Japan naphtha cargo swap and the CIF NWE equivalent -- was assessed at $8.25/mt, having nearly halved since the beginning of February to its lowest since Feb. 2, 2020.

The arbitrage to the East is likely to become more workable as propane -- which is used for heating in Europe -- gradually re-enters the European cracking pool as the northern hemisphere winter draws to a close.

That was evident in the values for the East-West spread for April, at $12.50/mt after falling 25% since the beginning of the month, and May at $14.75/mt after a 15% fall.

Freight

Freight markets, though, have weighed on arbitrage opportunities for eastbound naphtha shipments over the course of the month. Shipowners have commanded higher indications for the long-haul trip to the Far East, given the poorer back-haul options available.

Freight indications for Mediterranean-Japan shipments, basis 80,000 mt, hit a low at a $1.875 million lump sum at the beginning of February, since when shipowners have resisted further drops despite a build-up of tonnage and lack of cargo shipments eastbound.

Poorer indications in the back-haul market back to the West have been the main driver for that due to an oversupply of middle distillates in Europe, sources said.

Commonly, around three-quarters of the volume moving east from Europe are loaded in Mediterranean and Black Sea ports, with 25% filled by Northwest Europe and Baltic ports including Ust Luga.

When arbitrage economics are unfavorable, volumes from the Mediterranean and Black Sea are often redirected to Northwest Europe. The volume moving to Northwest Europe from the aforementioned locations in February was set to rise 69% month on month to 245,000 mt, according to commodity data company Kpler.

That would be the highest total since August 2019, highlighting the poor arbitrage environment.

Gasoline support

The European naphtha complex has seen support recently -- in the form of rising gasoline exports to the US -- from refinery outages in the US caused by the extreme weather.

For the week starting Feb. 15, an estimated 429,000 mt moved to US destinations from Europe, the highest weekly flow in more than a year, Kpler data showed.

However, the effect was expected to be short-lived, depending on the extent of damage to refining capacity, which has yet not been fully ascertained.

What will provide longer-term support for European naphtha is seasonally increasing demand for gasoline domestically, particularly with the accelerating roll-out of COVID-19 vaccination programs.

The March Northwest European gasoline swap closed at a $14.75/mt premium to the naphtha equivalent on Feb. 24, up from a $1.00/mt discount at the beginning of the month.

While some of the impact on the spread can be attributed to a shifting of gasoline production towards more costly summer specifications, the anticipation of COVID-19-related restrictions being relaxed across Europe in coming months has contributed to the more bullish sentiment.

Softer cracking demand

Meanwhile, naphtha's premium to propane has been widening since the beginning of February, a largely anticipated seasonal trend as demand for propane for heating falls back.

The March Northwest European propane swap closed at a $40.25/mt discount to the naphtha contract on Feb. 24, down 58% since the beginning of February and close to the usual pricing differential at which petrochemicals producers commonly increase LPG utilization rates.

Additionally, several planned steam cracker turnarounds over March could add to the more bearish sentiment for naphtha cracking grades.

Weekly US Energy Information Administration on Feb. 24 showed propane and propylene stocks in the US fell 5.158 million barrels in the week to Feb. 19.

But although that could signify a prolonged closure of the LPG arbitrage to Europe from the US, favoring naphtha as a feedstock, the data were likely distorted by the impact of the extreme weather temperatures in the US over the previous week.