FocusAsia naphtha backwardation widens on lower deep-sea flows

03 March 2011 05:18  [Source: ICIS news]

By Felicia Loo

Europe deep-sea naptha to Asia seen declining in AprilSINGAPORE (ICIS)--Asian naphtha backwardation is expected to widen further, helped partly by lower deep-sea European inflows in April, while a global crude rally has sparked off higher prices of the petrochemical feedstock, traders said on Thursday.

Backwardation spreads - referring to a market where prompt prices are higher than future prices - between second-half April and second-half May contracts widened to $7/tonne (€5/tonne) from plus $4.50/tonne on the previous week, ICIS data showed.

Meanwhile, the second-half April contract was valued at $1,000-1,004/tonne CFR (cost & freight) Japan on Thursday morning.

The contract closed at $990-992/tonne CFR Japan on Wednesday, according to ICIS data. No deals were done.

“Traders were too bearish on the market earlier. Now they are coming out to cover their short positions,” said one market player, explaining why the backwardation strengthened.

Fundamentally, a drop in arbitrage volumes helped buoy prices up.

The Asian naphtha crack spread versus Brent crude futures closed at $133.50/tonne on Wednesday, up $15.62/tonne from last week, ICIS data showed.

“Now the arbitrage window is closed,” said a trader.

Before that, some 200,000-300,000 tonnes of European arbitrage naphtha was expected to be shipped to Asia in April.

The arbitrage estimates will fall next month from 400,000-500,000 tonnes of Western supply that will arrive in Asia in March because many refiners in Europe are blending naphtha with gasoline for shipments to the US.

Plant maintenance in the US had drained off gasoline supply, traders said.

Some 300,000-400,000 tonnes of European gasoline were being shipped to the US Gulf coast to help plug a shortfall.

“European naphtha is used for gasoline blending. The US will start stockpiling gasoline for the driving season soon,” said a trader.

The peak driving season in the US starts from late May and ends in early September.

Gasoline stockpiles in the US, the world’s second-biggest energy user after China, fell 2.8 million barrels in the week ended 18 February, according to the Energy Information Administration (EIA).

Meanwhile, fears of oil supply disruptions fired up global crude futures, which in turn triggered a surge in naphtha prices.

The higher naphtha prices in turn eroded ethylene margin in northeast Asia by $145/tonne in the week ended 25 February.

Despite an increase of $35/tonne in ethylene prices, the rise could not offset a $78/tonne increase in naphtha prices, based on the ICIS margin report.

The chaos in Libya that has drastically reduced output from the OPEC member has sparked off fears that unrest could spread to other nations in the Middle East and North Africa, and threaten the global supply of crude oil.

Other countries in the region, including Oman, Bahrain and Iran, have experienced unrest in recent weeks since the overthrow of Egypt’s President Hosni Mubarak.

At 03:03 GMT, April Brent on London’s ICE futures was trading at $116.63/bbl, up 28 cents/bbl from the previous close. April NYMEX light-sweet crude futures traded 24 cents higher at $102.47/bbl.

On the other hand, the gains in naphtha backwardation would be limited in light of the continuous high supply from India and peak cracker turnarounds, traders said.

For March, Indian refiners would export 900,000 tonnes of naphtha – the top end of their monthly export levels, they added.

“Naphtha is still considered weak and slightly oversupplied because of peak cracker maintenance,” one trader said.

($1 = €0.72)

Additional reporting by James Dennis

For more on naphtha, visit ICIS chemical intelligence
Read John Richardson and Malini Hariharan’s blog –
Asian Chemical Connections


By: Felicia Loo



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