21 September 2012 11:05 [Source: ICB]
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 say.
With arbitrages out of Europe closed, a naphtha broker said: "The outlook isn't the greatest. The crack [spread] is a little weaker, which should help on the flat price, but the outlook is weak. There's more than enough stuff around, even with the upcoming refinery maintenance, and arbs [arbitrages] look closed."
A trader said: "[The outlook] is bleak; it will lengthen more unless arbs open."
In mid-September, 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 have lost $11/tonne as a result of a weaker crack spread. "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 is welcome news. It exerts downwards pressure on naphtha prices, which many believe is necessary in order to open arbitrages and relieve market length.
A trader said: "The Europe [price] 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.
When asked whether volumes might be sent east regardless, the source said: "Yes: [a major company is] 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."
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