Oversupplied Europe naphtha market gains support from Asia

12 July 2012 14:27  [Source: ICIS news]

LONDON (ICIS)--The oversupplied European naphtha market has found some relief after volumes were booked to head east, sources said on Thursday.

In response to market talk of up to seven cargoes provisionally being booked for Asia, a trader said: “I’ve just heard four ships have been fixed. Seven is a little much… subs [vessels booked, subject to conditions] doesn’t mean a cargo is really going east, anyway.”

“Three [cargoes] were fixed already, two more are on subs,” a second trader said. “It’s the best outlet right now.”

Further details of the fixtures are unknown.

European petrochemical demand for naphtha has been poor for many months. Demand for gasoline – and hence for blending components such as naphtha – is lower than usual at this time of year.

While the closure of Swiss refiner Petroplus’ Coryton refinery in the UK has increased gasoline imports to Britain, gasoline demand from overseas – particularly West Africa – is said to have weakened.

Furthermore, following a recent reverse arbitrage which saw cargoes from Latin America and the US start to arrive in northwest Europe late last week, the European market lengthened considerably. These vessels were said to total around 300,000 tonnes, although this could not be confirmed.

This in turn increased the need to find an outlet for surplus European stocks.

While the Asian naphtha market was also weak and oversupplied in June – and offered few opportunities for the movement of cargoes east – the last couple of weeks have seen it strengthen.

On Thursday the Asian naphtha crack spread reached $82.57/tonne (€67.71/tonne) – approximately $9.65/bbl – up from $76.53/tonne at last Friday’s close.

This compares with a European crack spread of minus $9/bbl on Thursday morning – also the figure it closed at on the afternoon of 6 July.

This strengthening of the Asian naphtha market is welcome news for Europe, and has led to some opportunities to move European material east.

However, many Asian market participants are sceptical regarding how long this strength can be sustained. Downstream Asian petrochemical demand is still very subdued.

Some Asian participants believe demand in China should pick up by the end of July, but are unsure of the duration of any increased requirements. Some believe it might only be sustained for less than a month.

Despite this movement of volumes east, there is some difference of opinion among European participants regarding whether an arbitrage is open to Asia.

“The arbitrage is not open,” the first trader said. “Index-wise it is unhedgeable to [arbitrage] the cargoes.”

The second trader said: “The [arbitrage] was open and locked in on these cargoes.”

On Thursday morning the east-west price spread was around $18/tonne. In economic terms, this should make it viable to book vessels for the east.

($1 = €0.82)

Additional reporting: Samuel Wong


By: Jo Pitches
+44 208 652 3214



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