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Highlights

Few fixtures seen for October loading program

East/West naphtha spread begins to widen, but arbitrage unviable on paper

European petrochemical producers to use naphtha as feedstock in winter

Singapore — The volume of naphtha arbitraged from Europe to the Far East petrochemical production hub has fallen on the strength of Europe's demand, while chartering activity for October loadings is lackluster as traders face a multi-month high freight cost, industry sources said.

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For October loading shipments for Europe to Japan, only two LR2 tankers were placed on subjects; comparatively, September loading shipments totaled 1.032 million mt and August loading shipments totaled 1.31 million mt, ship fixtures showed.

The key Mediterranean to Japan voyage was assessed at $2.475 million on Sept. 22, or $30.94/mt, stable day on day, Platts data showed. The freight was last higher four months ago on May 26 at $2.625 million, and $6-$12/mt higher than the East/West spread for nearly two months.

The spread between the October CFR Japan naphtha and CIF NWE naphtha assessments rose $1.50/mt on the day to $19.50/mt at the Sept. 22 Asian close, and edged higher on the European close, assessed at $21/mt, up $2.25/mt on the day, Platts data showed.

The differential averaged $20.375/mt to-date in September, an increase of 10.2% on the month compared with the August average of $18.49/mt, Platts data showed.

ARBITRAGE CLOSED ON PAPER

Although a higher differential could often signal higher arbitrage interest East, the factors under consideration to deem such interest viable are beyond a stand-alone raw pricing difference.

This is particularly relevant as the LR2 freight was 13% higher compared with the September month-to-date average of $2.394 million against the August average of $2.119 million. On the margin, freight increased at a higher rate than the East-West spread, discouraging European product holders to send naphtha volumes East.

"The East-West picked up only slightly, while we have to consider other factors as well to see whether the arbitrage is workable, which I don't think it is right now. There is not much interest [for loadings out of] Tuapse and Novorossiysk either," a European source said.

POSITIVE EUROPEAN SENTIMENT

European market fundamentals have recently seen more support, as reflected in a crack spread rally. The crack spread against ICE Brent crude oil November futures averaged minus 88 cents/b to-date in September compared with the August average of minus $2.55/b. The spread had turned positive on Sept. 17 at 5 cents/b. It was last positive in December 2017.

Despite persistently poor blending demand as reflected by a tight gasoline to naphtha premium, naphtha saw some support on stronger road fuel demand in Europe.Gasoline Eurobob AR October swap against the equivalent Naphtha CIF NWE contract was at a premium of $5.75/mt on Sept 22, averaging $4.86/mt month-to-date.

However, the seasonal switch to winter gasoline specification allowing for higher RVP requirements would see butane used in blending, displacing more naphtha volumes. This displacement could be exacerbated further by an overall decline in gasoline demand in light of increasing restrictions across Europe due to a second wave of coronavirus infections.

PETROCHEMICALS USING NAPHTHA FEEDSTOCK

Still, the naphtha complex was supported by petrochemical producers where demand was robust and cracking margins favorable, market sources said. Non-energy and feedstock demand was not affected as significantly by COVID-19, and demand for soft plastics particularly -- such as for food packaging and PPE where olefins such as ethylene and propylene serve as building blocks -- was expected to be robust for the remaining of the year.

Propane, competing with naphtha as a petrochemical feedstock, would see some decline in utilization as seasonal heating demand in NWE would boost propane prices. This would narrow the price differential between the two commodities in favor of naphtha. Naphtha CIF NWE October swap contract against Propane CIF NWE equivalent was $45.50/mt on Sept 22., and has averaged $49.25/mt month-to-date compared with the August average of $54.25/mt.

More supply from refineries returning from maintenance and higher import volumes has caused some uncertainty in the prompt, however, the longer term outlook for naphtha was positive.

"The market looks good a few months down the road," a European source said.

The European arbitrage to Asia could also improve significantly, according to industry sources. However, this could also depend on the Asian and European cash differentials.

US SUPPLIES TO ASIA

The Asian naphtha complex had seen the physical crack push to a year-to-date high on Sept. 18, however, some bearish sentiment from US cargoes offered for the H1 November delivery cycle has since edged prices down, market sources said.

"Hopefully the Asian market can cool down after more arbitrage volumes arrive," a North Asian naphtha end-user said.

The cash differentials for spot paraffinic naphtha parcels were assessed at plus $5/mt on Sept. 22, down $1/mt week on week, against benchmark Mean of Platts Japan naphtha physical assessments, on a CFR Japan basis, Platts data showed.

Asia's steam cracker demand for naphtha feedstock has remained robust, as most were operating at full or close to full run rates on the back of positive olefin margins, and faced supply tightness for high paraffin naphtha grades, market sources said.