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Feature: US Gulf Coast naphtha heads to Asia amid fallen freight; glut of ULSD left onshore

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Sunken freight rates for clean tankers due to a global demand decline amid the coronavirus pandemic has left thearbitrage from the US Gulf Coast to Asia wide open for naphtha,but the route to Europe for ultra low sulfur diesel remains shut despite a drop in USGC demand.

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Freight for clean tankers loading on the US Gulf Coast has dropped dramatically since mid-March as global demand for petroleum products has dropped, thus opening an arbitrage opportunity for naphtha from the USGC to travel to Asia. However, this opportunity has not opened for ULSD from the USGC to export to Europe, despite rates on the 38,000 mt USGC-transAtlantic route dropping to its lowest levels in 2020.

Shipping sources said the inactivity was due to the lack of demand, but suggested the recent uptick in activity in Asia could provide a model for the future demand of return.

"[Here it's] run cuts and a lack of demand anywhere," a shipbroker said Wednesday. "But the Asia market is pretty hot on the [clean tanker] side right now."

The shipbroker said it would probably take Europe and the Americas coming back 'online' for activity, and perhaps freight, to ramp up again.

Week on week, the Medium Range USGC-transAtlantic route fell more than 20% and more than 32% since freight peaked on March 10. Platts fixture logs showed the most recent cargo intended to discharge in the UK-Continent or Mediterranean was placed on subjects March 12. The 38,000 mt USGC-UK/Continent route was assessed at w95, or $19.64/mt, Thursday and the 60,000 mt USGC-UK/Continent route was assessed at w100, or $20.67/mt.

For the naphtha arbitrage, freight has fallen 7% week on week and more than 17% since peaking March 9 on that route. Platts fixture logs show five ships placed on subjects for the route in March alone, chartered by Valero, ExxonMobil, BP and Equinor.

NAPHTHA ARBITRAGE OPENS ON USGC OVERSATURATION

Shipping inquiries to send naphtha to Asia picked up as market players searched for homes for their barrels amid a lack of local demand.

An oversaturated gasoline market on the USGC amid the coronavirus pandemic has left no demand for light and heavy naphtha. More than 13 states are under mandatory stay-at-home orders in an effort to contain the spread of the virus.

Light naphtha is a gasoline blendstock. Heavy naphtha is a feedstock for reformers which produce reformate, an octane-boosting gasoline blendstock.

Sources said regional refiners have reduced reformer runs amid weak reforming margins due to low gasoline prices, meaning less domestic buyers for heavy naphtha.

Nationwide, US gasoline demand fell 859,000 b/d for the week ended March 20 to 8.8 million b/d, according to Energy Information Administration data Wednesday.

Light naphtha is a petrochemical feedstock in Asia. Petrochemical end-users in Asia also import heavy naphtha to feed into splitter units, which output light naphtha, kerosene and "true heavy" naphtha. Heavy naphtha is fed into aromatics units to produce paraxylene and the light is fed into ethylene crackers.

S&P Global Platts assessed heavy naphtha barges in the USGC Wednesday at barge gasoline minus 9 cents/gal, for a flat price of 40.29 cents/gal. Light naphtha was assessed at April natural gasoline, C5, minus 2 cents/gal, for a flat price of 38.75 cents/gal.

ULSD TO EUROPE ARBITRAGE CLOSED DESPITE LOW FREIGHT

Despite weakening freight rates, the export ULSD market has remained relatively stable during the coronavirus outbreak.

"Seems to be a decent amount of cargo moving," one source said.

Platts assessed the ULSD waterborne premium at plus 1.40 cents/gal over pipeline ULSD Wednesday, level to Tuesday's value.

While export ULSD prices have remained stable, their destination has changed as many in the Gulf Coast wait for a stronger market on contango market structure.

"I think a lot is going into storage for contango, not sure demand is still there to consume all the fuel," the source said.

Demand for ULSD nationwide has fallen 603,000 b/d in the past two weeks, most recently dropping 218,000 b/d for the week that ended March 20 to 3.80 million b/d, EIA data showed.

Although freight rates out of the Gulf Coast have weakened considerably, the arbitrage between that region and Europe has been closed for over a month amid the coronavirus outbreak.

The ULSD arbitrage from the USGC to Northwest Europe was shut at minus $1.54/b for a 38,000 mt cargo and at minus $3.08/b to the Mediterranean on Tuesday, according to Platts Analytics' Refined Product arbFlow.

The outlook for the arbitrage amid the outbreak appears grim for the foreseeable future, or at least until the situation is resolved.

"I think that there is less stuff that is going to go to Europe for a while," one Gulf Coast source said.

However, the source said once the world gets past this outbreak, more product could be sent to Europe than many believe. "I have a feeling when this is all over, we may be sending way more product places then people think," he said.