UpdateAsia naphtha 5-mth high on firm Europe price, French strike

07 October 2010 08:10  [Source: ICIS news]

(Updates with traders comments in paragraph 3, 4, 11 and 24)

By Felicia Loo

SINGAPORE (ICIS)--Asia naphtha prices scaled up to a five-month peak on Thursday on the back of strong European prices and French port strikes, even as a supply deluge continues to dominate the region, market players said.

Second-half November naphtha contract was assessed at $751-754/tonne (€541-543/tonne) CFR (cost and freight) Japan on Thursday morning, up $2.50-5.00/tonne from Wednesday as crude futures raced to more than $83/bbl and were within sight of a five-month high, ICIS data showed.

Traders said naphtha prices may stay strong in weeks ahead if the crude continued its firming trend due to weakness in the US dollar and low stocks in the United States.

"Despite weak fundamentals, naphtha prices are rising. Flat prices are subject to crude and if crude prices were to rise the next two months during peak winter distillate demand, I won't be surprised to see higher naphtha prices," one trader said.

Naphtha last hit the strongest levels on 10 May, when prices were pegged at $758-760/tonne CFR Japan, according to ICIS.

“It’s all Europe-led,” said a trader, referring to the surge in Asia naphtha. “Honestly, the market (Asia naphtha) is sluggish in the front month with no strong conviction.”

The French port strikes could seriously affect some chemicals production and global availability if they carry on for much longer.

Earlier on Wednesday, at the Fos-Lavera oil terminal in southern France was extended for a further 24 hours.

It was unclear how long was too long, but market players from a variety of industries were warily watching the progress of the 10-day strike, which sources were now speculating could last until the end of the next general strike on 12 October.

"It doesn't make sense for Asia naphtha prices to trend at such levels. But they are following crude and what's going on in Europe," another trader said.

Meanwhile, Asia was mired in hefty naphtha supply, as onshore inventories of naphtha, reformate and gasoline swelled to a three-week high of 11.355 million barrels in the week to 29 September, industry data showed.

An armada of Middle East flows was heading to Asia, with half a million tonnes expected to land in October in addition to ample exports from India, which were estimated at 800,000-900,000 tonnes, traders said.

But, on the other hand, Asia demand was lukewarm, they said.

“Formosa’s buying was not enough,” one trader said.

Taiwan’s Formosa Petrochemical Corp resumed naphtha purchases last week, securing by tender 150,000 tonnes of naphtha for first-half November delivery at a discount of $4.50/tonne to Japan quotes CFR. Asia’s top spot buyer skipped purchases for October because of cracker maintenance.

Hammering the market further, oil major Shell has been selling down physical naphtha in open market trading. It sold 300,000 tonnes of the product since mid-September, traders said.

“They (Shell) have been relentless,” the trader added.

Underscoring a glut, Kuwait Petroleum Corp reduced its term naphtha offer to a premium of $13/tonne to Middle East quotes FOB (free on board) for the December 2010 and November 2011 supply, compared with a premium of $21/tonne fixed for its August 2010-July 2011 term naphtha contract.

Even as outright naphtha prices climbed higher, the weak fundamentals were reflected in a widening contango and shrinking crack spreads in Asia, traders said.

According to ICIS, the spread between second-half November and second-half December contracts widened to a contango of minus $1.25/tonne from minus 50 cents/tonne last week.

Naphtha crack spread versus Brent crude futures weakened to $113.83/tonne on Wednesday’s close from 115.18/tonne on Tuesday.

"Naphtha is long on supply in Asia. I don't expect the market to improve until December, when we may see some balance," said a trader.

However, naphtha could seek solace from a firmly closed arbitrage window from Europe where prices were unusually higher than Asia, traders said.

Europe naphtha prices climbed up to $755-763/tonne amid tighter supply and lower refining throughput, ICIS data showed.

“Europe is very strong due to the French strike and demand is good too. Some Mediterranean cargoes are instead heading to Northwest Europe,” a trader said.

($1 = €0.72)

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By: Felicia Loo

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