26 October 2012 13:26 [Source: ICIS news]
By Jo Pitches
LONDON (ICIS)--Demand for European naphtha remains muted and the market is still set to lengthen despite the crack spread having firmed considerably during recent days, sources said this week.
By Friday morning, the November refining margin had firmed to minus $4.40/bbl. This compares with a crack spread of minus $7.38/bbl two weeks ago.
Some sources have said this strengthening is a result of the prospect of Asian demand for European naphtha returning. ICIS reported on Thursday that tight supply and firm demand is supporting Asian naphtha refining margins and prices.
However, some European sources believe the tighter Asian market is not yet having any impact on demand for European volumes. On Wednesday, when the European November crack spread stood at minus $4.75/bbl, a trader said: “Not at all,” when asked whether the spread was being supported by theoretically renewed demand from Asia, adding: “The arb [arbitrage] [to Asia] is closed.”
On both Thursday and Friday, the east-west price spread stood at $1-2/tonne. While dependent on factors such as freight rates, a spread of $15-20/tonne (€12-15/tonne) is usually deemed necessary for an arbitrage to open to Asia.
The trader cited “bull play” as the reason for the relatively strong refining margin on Wednesday. “Especially with crude down to $108.50/bbl, which is destroying the flat price,” the source added.
By Thursday morning, when the crack spread had strengthened further to minus $4.50/bbl, a second trader also attributed this firming to “bull play”.
This source said: “Window trades are $10/tonne higher than in the floating market to sustain the bull play. It creates an artificial backwardation, which closes arbs out of Europe.
“Europe was genuinely tight in October with Skikda [refinery in northeastern Algeria] issues and turnaround of refineries,” the source added. “But now looking ahead, it looks very overdone.”
A broker said on Thursday: “I think the current strength is supported by a tight-ish prompt market but further out, more a paper play than anything else if you ask me.”
The European market looks set to lengthen further in the coming weeks. “It is fair to say that a lot of refineries are still in turnaround,” the first trader said on Wednesday. “But the arb [to Asia] is closed, demand is not great and a lot of volume (supply) is appearing for November.”
On Friday, a buyer said: “Physical demand in Europe is not strong, and it’ll be the end of the year soon [meaning activity slows further as stocks are run down]. It’s a bit tight on the prompt, but the second half of November is looking long.”
Of further concern to the oversupplied market is the fact that European naphtha prices are so robust that volumes from other regions are being drawn towards Europe.
“Europe is so strong that the arb from the US into NWE is even open,” the first trader said on Wednesday. When asked whether any volumes are heading from the US to Europe, the source added: “Not yet, but looking at the economics it would make sense.”
On Thursday, the second trader agreed that the aforementioned reverse arbitrage is open, as did a buyer on Friday. Whether inbound volumes do indeed arrive in Europe in the coming weeks remains to be seen.
($1 = €0.77)
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