FocusPoor demand means Europe naphtha outlook remains bleak

13 September 2012 13:58  [Source: ICIS news]

LONDON (ICIS)--The outlook for the European naphtha market is still considered bleak as a result of subdued demand and few opportunities to offload surplus stock, sources said this week.

With arbitrages out of Europe closed, a naphtha broker said: “I would indeed agree that the outlook isn't the greatest. The crack [spread] is a little weaker, which should help on the flat price, but the outlook is indeed weak. There’s more than enough stuff around, even with the upcoming refinery maintenance, and arbs [arbitrages] look closed indeed.”

“Yes, it’s [the outlook] bleak, it will lengthen more unless arbs open,” a trader said.

On Thursday morning, the east-west spread for October prices stood at $3-4/tonne. While dependent on factors such as freight rates, it is generally thought that a spread of $15-20/tonne (€12-16/tonne) is required for an arbitrage to open to Asia.

European naphtha prices lost $11/tonne this morning compared with 15.30 GMT on Wednesday, as a result of a weaker crack spread. ICIS reported that Asian naphtha prices have also lost ground - this softening stems from muted petrochemical demand in the region.

“The east is a little down as well, so despite the lower [European naphtha] crack, there’s no change on the east-west spread, and the arb is still closed,” the broker said.

Nevertheless, the further weakening of the crack spread this morning– minus $6/bbl for October, compared with minus $4.55/bbl at 15.30GMT on Wednesday, and minus $3.80/bbl at the same time on Tuesday – is welcome news. It exerts downwards pressure on naphtha prices, which many believe is necessary in order to open arbitrages and relieve market length.

On Wednesday, a trader said: “Europe [prices] is far too strong still. The flat price has to be corrected; as such high levels are unsustainable for Brazil and Asia, and Europe of course.”

While sources said there are shortages of naphtha in Asia, as a result of a reduced supply from India, Asian requirements may not be sufficient to absorb Europe’s surplus.

“India normally makes about 730,000 tonnes/month, they are only making 500,000 tonnes this month, so the east needs about 250-300,000 tonnes from the west, which the west can very easily supply. But with Europe [prices] so strong (very high cracks and very strong backwardation) the arb is currently not workable,” the trader said on Wednesday.

When asked whether volumes might be sent east regardless, the source said: “Yes, they [a major company in particular] are putting LRs [long range vessels] carrying 80,000-90,000 tonnes on subs [booked subject to conditions] to go east. They don’t mind losing on the physical as they are making so much on the paper [market]. But everything can’t be absorbed by Asia, so Europe should remain long.”

While Brazil has recently purchased European volumes, it seems unlikely that more will be required in the near future.

“Brazil is trimming rates on crackers by 5%,” the trader said on Wednesday.

“There are no solutions [to move stock out of Europe] that work economically,” a trader said on Thursday.

($1 = €0.78)

By: Jo Pitches
+44 208 652 3324

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