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London — Russian naphtha exports are declining in July while domestic refineries ramp up gasoline output to cover the shortfall following months of reduced production.

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Northwest European naphtha traders said Russian naphtha exports are much smaller than usual.

"Russian exports are less than half we normally see," a trader said.

Data from Kpler software showed on July 7 that about 168,551 mt of full-range naphtha including Light Virgin grades mainly used for gasoline blending as well as petrochemicals grades, could be loading in the Baltics with a European destination for July, from 629,537kt in June. The majority of the July volumes are loading at port terminals at Ust-Luga.

Russian naphtha exports rose after March as refiners preferred to produce naphtha instead of gasoline, amid anticipated weak domestic demand during the lockdown introduced to combat the spread of the coronavirus, but also to benefit from improved demand from the petrochemical sector.

Gasoline exports were also up, rising 148.8% month on month in March and 47% over January-April, according to customs data.

Meanwhile, gasoline production was curtailed, dropping 29.5% month on month in April, the first full month of nationwide restrictions. Output continued to fall in May, as Russian refineries entered large-scale maintenance and also cut runs amid concerns that reduced traffic was taking up to 50% of the gasoline consumption.

However, contrary to expectations, gasoline demand started to recover in May and surged in June as the lockdown was eased.

"Demand in Russia has recovered very fast and could exceed last year," a Russia-based trader said.

Gasoline demand seen rising further

The demand surge pushed prices, especially of premium unleaded 95 RON, to record highs, forcing the government to recommend a reduction of exports while calling on refineries to raise output.

While full June export data is not available, exports of Euro 5 gasoline alone halved last month and production was up 31.8% from May, according to energy ministry data.

Stocks also rose to 1.4 million mt, the ministry said, though traders said stocks remain low and thus still provides a boost to prices as demand continues to firm.

Gasoline demand is expected to continue to climb as many people opt to travel by car rather than public transport, but also to drive to Russian resorts this summer, sources said.

As a result, gasoline output is also projected to increase, especially as refineries have mostly completed maintenance. This would also result in less naphtha available for exports as heavy naphtha grades could be processed in catalytic reformers to boost octane numbers, while light naphtha grades can be added directly into the blending pool.

The increased gasoline production has started pushing down Russian domestic gasoline prices, which started to retreat this week.

But European naphtha has seen a significant boost in prices, led in particular by a supply squeeze stemming from reduced refinery runs, but also the decline in exports from the Baltics and particularly Russia.

"The lack of exports out of the Baltics is really adding to the overall supply reduction we see in the naphtha market," a source said.

Naphtha CIF NWE was assessed at $403/mt on July 6, up $8/mt on the day and above the $400/mt mark for the first time since March 3. This was a 10.8% increase week on week, and the upside is expected to continue, particularly if more gasoline blending demand absorbs naphtha blendstock grades.