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Europe-Asia naphtha arbitrage volumes fall to 1-year low for Oct loadings

Highlights

Europe to Asia flows fall for fourth month for October

Narrow East-West spread caps arbitrage opportunity

Med-NWE naphtha flows at 3-year high

Strong regional demand in Europe is continuing to quell the flow of European arbitrage naphtha to Asia, pushing down volumes for the October loading program by 5.91% from September.

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October-loading Europe to Asia naphtha shipments total around 1.195 million mt, down from 1.27 million mt the month before, according to data from market sources and S&P Global Platts cFlow.

The monthly volume was last lower for the October 2020 loading program at around 1.19 million mt, Platts data showed.

While Asia's appetite for naphtha was robust due to positive olefin margins and the unviability of using LPG as an alternative feedstock, traders found it economically unviable to send arbitrage naphtha to Asia and instead kept cargoes to meet strong demand in Europe.

The sparse volumes could continue for the November loading program, as the key spread between front month November naphtha C+F Japan cargo and CIF NWE cargo -- an indicator of arbitrage opportunity -- widened to $12/mt at the Oct. 27 European close from $10.25/mt the week before, but remained lower than freight costs of $23.13/mt for an LR2 Mediterranean to Japan voyage, Platts data showed.

Chartering activity has begun for the November-loading program, with three Long Range II tankers and two LR I tankers heard booked to load around 370,000 mt of European naphtha in the first week of November for Asia-bound voyages, sources said.

A naphtha cargo from Europe typically takes around a month to arrive in North Asia via the Suez Canal, shipping sources said.

Asia has been able to source naphtha cargoes from the American continent to fulfil its net shortfall of naphtha.

Tight European market

Typically 90% of European volumes moving to Asia originate from the Mediterranean and Black Sea. When arbitrage economics to the Far East are unworkable, a substantial portion of those volumes are redirected to other regions, predominantly Northwest Europe.

The current loss of appetite for the route East resulted in multi-year high flows redirected from the Mediterranean and Black Sea to NWE, totaling 369,000 mt for October to date, up from 279,000 mt in September and already the highest since December 2018, Kpler data showed.

Despite the decline in European cracking margins from a spike in feedstocks costs, domestic petrochemical producers remain the largest demand source for naphtha, with demand for gasoline blending thin. Stronger ethylene demand was expected in November, and naphtha supply remains short as refiners were not inclined to raise runs due to the spike in natural gas prices.

Also, the substantial natural gas costs had a more profound spillover effect on LPG, which continues posting steep premiums against naphtha, leaving little feedstock alternatives for petrochemicals producers.

The front month propane swap contract closed at a $36/mt premium to naphtha equivalent Oct. 27 and has averaged $80.22/mt for October to date, well above September's average of $50.16/mt, Platts data showed.

European refiners do not have access to large amounts of ethane as a feedstock alternative and insufficient ethane processing capacity. Some volumes are imported from the US, however the natural gas shortage has limited ethane imports. Around 124,000 mt of ethane is expected to reach Europe for October so far, down from 155,000 mt in September and lowest since March, Kpler data showed.

The persistent volatility in the crude oil complex has added to volatility in naphtha swaps, however due to bullish sentiment the crack spread has remained well within positive territory.

Latest Energy Information Administration data showed a build in US crude oil inventories that was stronger than initially indicated by the API, which subsequently introduced more bearish sentiment into the oil complex. The EIA reported a 4.268 million-barrel build in crude oil for the week ending Oct 22, while the API had reported only a 2.3 million-barrel build. US gasoline stocks declined by almost 2 million barrels in the week according to the EIA, however the draw failed to substantially influence naphtha sentiment, particularly as gasoline arbitrage interest West is weaker than domestic demand.

Europe to Asia naphtha fixtures:

Vessel

Quantity ('000 kt)

Cargo

Laycan

Voyage

Freight

Charterer

BW Triton

80

NA

Oct30

Novorossiysk-Brazil, Japan

w80, $1.8m

Litasco

BW Despina

80

NA

Oct27

Novorossiysk-Japan

$1.825m

ST Shipping

Sea Legend

80

NA

Oct26

Skikda-Japan

$1.7m

ST

BW Hudson

60

NA

Oct25

Tuapse-Japan

$1.7m

BP

Captain John

80

NA

Oct24

Black Sea-UKC, Brazil, Japan

rnr, rnr, $1.7m

Trafigura

STI Solidarity

80

NA

Oct20

Skikda-Japan

rnr

BP

Celsius Rome

35

NA

Oct20

Huelva-Japan

$1.15m

Cepsa

STI Alexis

80

NA

Oct20

Eleusis-Japan

$1.75m

ATS

BW Yarra

60

NA

Oct16

Tuapse-East

$1.725m

ATS

STI Carnaby

80

NA

Oct12

Novorossiysk-Japan

$2m

Trafigura

Front Altair

80

NA

Oct10

Novorossiysk-Japan

$2.2m

Litasco

FPMC P Hero

80

NA

Oct10

Tuapse-Japan

rnr

Trafigura

Pink Star

80

NA

Oct5

Taman-Japan

Own Prog

Bp

Hua Lin Wan

80

NA

Oct4

Ust Luga-East

$2.125m

Novatek

STI Sloane

80

NA

Oct2

Eleusis-Japan

$1.95m

ATS

Yuan Ju Wan

80

NA

Oct1

Ust Luga-Chiba

$2.2m

Novatek

Key: NA= naphtha, rnr= rate not reported, cnr= charterer not reported

Source: Industry sources, S&P Global Platts cFlow