Europe-Asia naphtha arbitrage closes amid Egypt unrest, piracy risk

LONDON (ICIS)--The naphtha arbitrage from Europe to Asia has closed because of prices firming on the back of an increase in crude oil futures and higher transport costs, market sources said on Friday.

While the crisis in Egypt and its potential to disrupt oil facilities in the region pushed crude oil prices up, naphtha values have been further supported by freight rates firming due to the increase in piracy risk.

The cost of transporting a 50,000-tonne cargo from the Mediterranean to Asia had increased by around $2.75/tonne (€2.01/tonne) in two weeks, according to a market source.

“A fortnight ago it would have cost around $1.85m to send a large cargo [from Europe to Asia]. Now it’s approximately $2m,” the source said.

The increase was partly due to rising crude oil prices and consequently higher fuel prices. In addition, insurance premiums have increased as a result of recent pirate attacks on vessels in the North Arabian Sea and Indian Ocean.

“A vessel from Saudi Arabia on its way to Taiwan was attacked last weekend,” another source said.

There were believed to have been several other recent attempts to hijack vessels around the Gulf of Aden.

Crude oil prices have risen over the last few days due to fears that the political unrest in Egypt will affect global oil supplies. This in turn has driven up the price of naphtha.

“All together this adds up to around an extra $6/tonne, which means the arbitrage to Asia no longer works,” the source added.

The arbitrage to Asia opened last week as the European market became oversupplied and the naphtha crack spread weakened. This allowed the movement of excess product to Asia.

Another source revealed that there was also concern about the possible closure of the Suez Canal if the unrest in Egypt continued.

Closure of the vital canal would mean vessels would have to travel around the African continent, adding extra fuel costs and around ten more days to the journey.

However, this seemed increasingly unlikely due to the volume of traffic that travels through the Suez Canal.

“Closing [the canal] would not be in anyone’s interest, least of all Egypt’s,” a source added.

Rising crude prices have driven the weekly average naphtha cargo price from $837.50/tonne on 28 January to $865/tonne on Friday.

On 28 January, March Brent crude was trading at $98.42/bbl. At 15:00 GMT on Friday, it was at $101.97/bbl.

($1 = €0.73, €1 = £0.84)