FocusEurope naphtha needs outbound arb to counteract oversupply

19 October 2012 12:09  [Source: ICIS news]

By Jo Pitches

LONDON (ICIS)--The European naphtha oversupply that has been predicted in recent weeks is now starting to build and an arbitrage out of Europe must open soon in order to combat it, sources said this week.

“Yes, that’s what I think,” a producer said on Wednesday when asked whether an arbitrage to Asia needs to open soon in order to relieve the growing surplus. “Europe [prices] needs to come down to open the east-west [price spread] or Asia to strengthen.”

On Friday, the arbitrage to Asia was firmly closed, with an east-west spread of $3.75/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 the east.

A buyer said on Friday that volumes may soon need to be pushed to Asia to counteract the oversupply, even if arbitrage economics do not work.

“It’s nearly the financial year-end [meaning participants like to avoid holding large stocks], the US gasoline market is coming off, the Asian economy is not good, Asian demand is weak… Yes, volumes might need to be pushed east.”

According to a producer on Friday, this is already happening. “Two LR2s [long range vessels] are loading in the ARA [Amsterdam-Rotterdam-Antwerp region] now to take out heavy nap with oversupply top up.”

Several weeks of European refinery maintenance had kept an oversupply at bay. However, refineries are now starting to come back online. Combined with closed arbitrages out of Europe and poor demand, there is little to absorb the increased supplies.

Early in the week participants pointed out the disparity between a relatively strong crack spread and prices, yet a lack of physical support for naphtha.

On Monday, a trader said: “Despite no arbs open, refineries coming back from maintenance this second half [second half of October], very poor macro [macroeconomic conditions] in Europe destroying demand and gasoline literally collapsing - Eurobob [gasoline] cracks [spread] have fallen more than $10/bbl in a week, from $19/bbl last Monday to less than $9/bbl today - nap recovers today. It’s just insane.”

On Wednesday a producer said: “I am slamming my head in the wall trying to understand it [relatively robust naphtha prices and crack spreads] myself. Gas/nap [the price spread between gasoline and naphtha] has narrowed a lot.”

Weaker gasoline refining margins - plus the gasoline-naphtha price spread having narrowed to $31/tonne by Thursday - mean less of an incentive to purchase naphtha for gasoline blending.

Petrochemical demand for naphtha is also described as poor, despite naphtha having the price advantage over rival feedstock propane.

On Friday morning, November propane prices stood $66/tonne above naphtha.

At the same time, the naphtha cargo range was assessed at $968-975/tonne CIF (cost insurance and freight) NWE (northwest Europe), while the November crack spread stood at minus $5.25/bbl.

By: Jo Pitches
+44 208 652 3214

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