FocusOversupply threatens Europe naphtha market in late October

11 October 2012 12:53  [Source: ICIS news]

By Jo Pitches

LONDON (ICIS)--While the European naphtha market is currently tight, an oversupply threatens to build later this month as refineries come back on line following maintenance, and arbitrages open into Europe, sources said on Thursday.

“It’s tight this week and next week, then balanced to long for the last decade [last 10 days of the month],” a trader said.

A producer added: “It’s tight in the front, but longer later in the month. Supply is reduced at the moment because of [refinery] turnarounds, and some petchem restocking at the beginning of the month.”

This market tightness has resulted in elevated prices for prompt material and a steep backwardation between October and November values – in the high $20s/tonne on Thursday morning.

Such robust naphtha prices mean that product from other regions is being encouraged towards Europe. Furthermore, any inbound arbitrage cargoes could arrive around the time that European refineries come back online.

“There could be some movement into Europe,” the producer said. “Med, Red Sea into Europe. Maybe from the US to Europe…”

The trader agreed. “Europe is so strong that the arb is open from the Red Sea, and some Red Sea barrels have been shown to us.”

A second trader added: “[Cargoes moving from] US to Europe, not sure yet. Red Sea, yes. We are showing one into Europe.”

Meanwhile, arbitrages out of Europe remain closed. On Thursday morning, the east-west price spread for November stood at $6/tonne. While dependent on factors such as freight rates, a spread of $15-20/tonne is usually deemed necessary for an arbitrage to open to Asia.

The arbitrage to the US is also shut, although it is thought that a small vessel has been booked to head west for gasoline blending purposes.

While there has been talk of petrochemical restocking, reactions are mixed regarding the extent of this.

“I don’t buy that [the notion of petrochemical restocking],” the first trader said. “Dow and BASF are offering in the window.”

Furthermore, while rival feedstock propane has been priced significantly above naphtha for the last few weeks, rendering the latter the first choice for petrochemical buyers, the price spread is starting to narrow.

On Thursday morning, November propane was $40/tonne above naphtha. The previous Friday it was $73-74/tonne above.

If naphtha’s price advantage continues to diminish, this could see petrochemical buyers think harder about their choice of feedstock.

Arbitrages out of Europe need to open later this month in order to curb the expected oversupply, sources say.

“We need arbs to open in early November,” the producer said. “The market will be long [otherwise].”

By: Jo Pitches
+44 208 652 3214

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