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Feature: Asia, Europe naphtha markets volatile as virus, gasoline throw curveballs

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Platts Market Data Metals

Feature: Asia, Europe naphtha markets volatile as virus, gasoline throw curveballs

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Naphtha shifts reflect movement in gasoline complex

High freight, naphtha weakness close arbitrage into Asia

Singapore — Naphtha markets in both Asia and Europe are proving volatile in the week of Oct. 18, bouncing between tracking lower when fresh coronavirus outbreaks dampen demand outlooks and higher in the lead-up to the release of US gasoline stocks data overnight that had been widely expected to report a draw -- and didn't.

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The European naphtha market has been aligning with gasoline market developments in recent sessions, while also closely mirroring the crude oil complex. Support from petrochemicals producers has been weaker than usual, while a spike in coronavirus cases and the reimposition of restrictions were adding to uncertainty over demand.

Reflecting the volatility in the crude oil complex, the CBOE OVX index, which tracks the implied volatility of at-the-money strike prices for the US Oil Fund Exchange-traded fund, closed at 47.58% Oct. 21, up 8.506% day on day and up 9.3% week on week.

The sharp daily increase was linked to initial expectations that Energy Information Administration data released Oct. 21 would show a decrease in US gasoline stocks, and proved shorter than expected when the data instead showed a 1.895 million-barrel increase.

EUROPE NAPHTHA BEARISH

European naphtha was supported by US gasoline earlier in October, but sentiment has weakened as inventories increase against expectations and the outlook for road fuel demand fades globally as movement restrictions to contain a resurgent COVID-19 are reimposed.

As an indicator of the arbitrage to the US, the NYMEX RBOB crack spread against Brent frontline swaps fell 11% week on week to $5.78/b Oct. 21, while intraday volatility was also elevated.

"[RBOB-Brent crack spread] was shooting around because of the stats today," a market source said late Oct. 21.

The volatility was greater for naphtha CIF NWE crack spreads against Brent over the day, ranging from minus 15 cents/b to 60 cents/b, to close at 50 cents/b Oct. 21, Platts data showed.

The volatility for crack spreads on a standard deviation basis has spanned 88 cents/b in the week to date, outpacing 72 cents/b the week before.

With gasoline export demand bearish, domestic blending margins have collapsed to a near-7 year low, with the gasoline Eurobob FOB AR November swap against the equivalent naphtha CIF NWE contract at minus $5.50/mt Oct. 21, doubling the discount from the week before, Platts data showed.

"Light distillates have been overvalued for quite some time now, they should retract more," another market source said.

Nevertheless, in relative terms, European prices remain too high for traders to consider sending naphtha volumes East, particularly as freight economics are unfavorable, while more demand was expected to emerge from petrochemicals producers in Europe.

GASOLINE STOCKS MOVE NAPHTHA SWAPS

Sentiment in the Asian naphtha derivatives market has crunched since the half-month roll, with the structure in negative territory since Oct. 19. Participants said trading sentiment was weighed down by the fresh availability of cargoes and downward movement in the gasoline complex.

Similar to the European complex, swap timespreads had rebounded earlier in the week when the market had expected US gasoline stocks to fall, with the front month November/December Mean of Platts Japan naphtha swap timespread assessed at minus 75 cents/mt at the Asian close Oct, 21, up 75 cents day on day, Platts data showed.

The uptick in the Asian swaps structure also reflected the closed West-East arbitrage. After the EIA announced the rise in US gasoline stocks late Oct. 21, the swap structure did not retreat as far as it had over Oct. 19-20; brokers pegged the November-December MOPJ naphtha timespread at minus $1/mt in mid-morning trade in Asia Oct. 22.

CLOSED ARBITRAGE TO ASIA

With the arbitrage currently closed on paper from both Europe and the Americas, Asia's naphtha buyers may struggle to meet their requirements for late December -- some overhang from the November delivery cycle was available for the front of the December delivery cycle, sources said.

Western arbitrage volumes from Europe, the US and North Africa total just over 2 million mt for the November delivery cycle. Asia is typically 2 million/mt month net short of naphtha and strives to cover the shortfall with imports from the West of Suez.

The spread between the November CFR Japan naphtha and CIF NWE naphtha futures contracts for November was assessed down 25 cents/mt day on day at $16.50/mt at the Oct. 21 Asian close and remained unchanged at the European close, Platts data showed.

Freight for the key LR2 Mediterranean-Japan voyage was assessed stable day on day at $1.5 million lumpsum, or $18.75/mt, Oct. 21, Platts data showed. While this was the lowest since Sept. 5, 2018, but still higher than the price spread between the two markets -- most European arbitrage seekers move naphtha East on an FOB MED basis, which was assessed at $359.50/mt Oct. 21, up 2% since Oct. 1.