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NWE naphtha physical discount and contango at narrowest level in 6 weeks

The contango in the Northwest European naphtha market as well as the physical discount were assessed Monday at their narrowest level in six weeks as the NWE naphtha market strengthened, boosted by an improved Asian naphtha market and steady demand for gasoline blending.

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The CIF Northwest European naphtha cargo value rose $7.25/mt Monday to be assessed at $620.25/mt, which represents a $3.25/mt discount to the front-month swap, compared to a $4/mt discount Friday. The last time, the NWE naphtha cargo was assessed at a discount as narrower or narrower was September 30, when the discount to the front-month swap was 25 cents.

Meanwhile, the front-month/second-month CIF NWE naphtha contango decreased $1/mt Monday to $4.25/mt, its narrowest level since October 2, when it was also $4.25/mt.

Only one week ago, on November 10, the the front-month/second-month contango was assessed at $10/mt, while the cargo was assessed $19.50/mt below the front-month swap, which was the deepest physical discount for over five years.

"The pick up in the Asian naphtha market has boosted sentiment in Europe," a trader said, adding that the NWE naphtha market was still oversupplied, with LPG remaining the preferred feedstock for petrochemical end-users in Europe.

An end-user said: "It looks a bit stronger in Asia. In Europe, blending is still going on and there is still a physical discount [for open spec] for sure but not too wide."

Looking East, the front-month east/west spread -- the premium of CFR Japan naphtha cargo swaps over the CIF NWE naphtha cargo swap -- was pegged little changed over the day at around $38.50/mt, versus $38/mt Friday. While sentiment among traders was mixed in Asia, physical discounts to CFR Japan cargo swaps narrowed.

"The east is helping. But so far with expensive freight the arbitrage is tricky to work to east from Europe so this suggests that Europe may have done too much," a trader said.

According to market participants, the main effect of the narrowing contango in Northwest Europe will be that naphtha will be pushed out of storage tanks. "There will be no more storage play," an industry source said.

Another source said: "There was additional demand for storage with very low spreads, but the spreads have rallied a lot now and so it is not so compelling to want to store naphtha. I think [naphtha] can stay in tank until December, but certainly not past January now."

--Virginie Malicier,
--Edited by Jeremy Lovell,