Oversupply threatens Europe naphtha market as US arb closes

25 March 2011 16:19  [Source: ICIS news]

LONDON (ICIS)--The European naphtha market is in danger of becoming oversupplied due to the arbitrage to the US closing, market sources said on Friday.

This added to existing oversupply threats posed by a closed arbitrage window to Asia and poor demand from the petrochemical sector.

The threat of oversupply was in contrast to the situation earlier in the week when strong demand from the US and Brazil was outweighing a lack of demand from Japan following the 11 March earthquake, causing the market to tighten considerably.

However, this began to change when Europe naphtha price hikes led to the closure of the arbitrage to the US around the middle of the week.

The average price of naphtha this week was $985.80/tonne CIF (cost, insurance and freight) NWE (northwest Europe), compared to last week’s average of $941/tonne.

“The arb west started to close on Wednesday”, a producer said.

The market had been threatening to lengthen since the Japanese earthquake. However, contrary to expectations, an oversupply situation has so far been avoided.

“It has been doing that for some time now, but it keeps clearing”, a trader said, referring to the danger of the market lengthening.

This was due to healthy demand resulting from the forthcoming US driving season.

However, without the opportunity to send material west, it looked less likely that oversupply would be averted this time.

Regarding Asia, market participants and an analyst said they believed it was likely that there would be little if any demand from Japan for the foreseeable future.

Further exacerbating the threat of oversupply, petrochemical buyers continue to favour rival feedstock LPG over naphtha due to its cheaper prices. This was despite the price gap narrowing.

“There’s still a $40-45/tonne difference between propane and naphtha now”, a buyer said. “People are still choosing LPG.”

All of this led to a degree of trepidation in the market.

“Next week we will see product building in Europe”, a trader said.

However, a lowering of prices could change the situation.

“If the arb stays shut, premiums will have to come down or volumes will start to build in Europe”, the producer commented.

At 15.30 GMT Europe naphtha was trading at $988-996/tonne CIF NWE, remaining steady from the previous afternoon.

By: Jo Pitches
+44 208 652 3214

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