22 June 2012 13:17 [Source: ICIS news]
“There’s a lot of anxiety, crude oil prices are so volatile,” a naphtha buyer said. “People are holding back to see if it gets cheaper.”
At 10.00 GMT, the naphtha range was assessed at $689-697/tonne CIF NWE (cost, insurance and freight, northwest Europe). August Brent crude oil was at $90.14/bbl, and the July crack spread at minus $12.60/bbl.
Naphtha values were last at a similar level on 28 September 2010, when the naphtha range was assessed at $695-703/tonne CIF NWE. Front month Brent crude oil was at $79.37/bbl and the October crack spread at minus $1.30/bbl.
Early on Friday morning, Brent crude oil prices plunged to new 18-month lows after 15 of the world’s largest banks had their credit ratings cut by the Moody’s agency. This sent tremors through global stock markets. However, while this encouraged a bout of pre-weekend profit-taking, causing prices to regain lost ground, values nevertheless remain low.
Despite the naphtha crack spread also recovering to some extent, compared with levels of minus $14-15/bbl recently, it too remains very weak.
The softness of the spread is attributed to a weak Asian naphtha market.
European petrochemical demand has been poor for months. Combined with fewer naphtha requirements from the US, and limited demand from the gasoline sector, Europe has become increasingly dependent on an arbitrage to Asia to offload surplus stock.
However, with the Asian market also oversupplied and suffering poor demand, the arbitrage east has been closed. This is causing an oversupply to build in Europe.
“Yes, it’s pessimistic,” a trader said on 14 June. “The door to the east is closed, and we’re quite dependent on an arb to the east.”
“Petchems are struggling in Europe and now in Asia, and the US has shale gas now,” a producer said on 15 June. “Gasoline demand isn’t what it was…”
Exacerbating the gloomy prospects for arbitrage opportunities east, ICIS reported on Friday that Asian naphtha prices have also fallen to a 21-month low on weaker crude oil prices and ongoing bearish sentiment.
The buyer suggested that this could result in a reverse arbitrage, with volumes that would normally head east from the Mediterranean instead moving to northwest Europe.
“We might see a reverse arb, from the Red Sea to northwest Europe,” the source said. “We won’t see the effect yet, though, as the vessels won’t arrive until late July or early August.”
If such a trade flow did occur, it is unlikely that demand would be sufficient to absorb the extra volumes, suggesting a growing oversupply.
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