FocusEurope naphtha crack spread should weaken to open arbs

01 November 2012 11:41  [Source: ICIS news]

By Jo Pitches

Naphtha crackerLONDON (ICIS)--European naphtha refining margins need to soften in order to lower naphtha prices and open arbitrages out of northwest Europe to relieve the building oversupply, market participants said this week.

On Thursday morning the November crack spread stood at minus $3.80/bbl. This compares with a spread of minus $7.38/bbl almost three weeks ago.

“Yes, the physical [market] is getting really oversupplied, particularly for the second half of November,” a buyer said on Thursday. “I agree the crack needs to weaken to open an arb.”

When asked on Wednesday whether the naphtha refining margin should soften, given poor blending demand, closed arbitrages out of Europe, and the market lengthening, a producer agreed it should.

“Yes, I think the European crack might come off,” the source said.

On the same day, a trader also believed the crack spread should weaken: “Yes I do [think it should soften], and with refineries coming back [from maintenance] we should come down from such high crack levels.”

On Wednesday, ICIS reported that the Asian naphtha crack spread and price backwardation had both strengthened as a result of tighter supply and healthy demand.

This led to hopes of Asia being able to absorb some of Europe’s surplus naphtha. However, economics are keeping the east-west spread narrow and the arbitrage firmly closed for most grades of naphtha.

On Thursday morning the east-west price spread was flat for November values and $7/tonne for December. While much depends on factors such as freight rates, a spread of $15-20/tonne is usually considered necessary for an arbitrage to open east.

“Premiums in Asia are creeping up,” the producer said on Wednesday. “I think we will need Europe [prices] to come off a bit before that arb [to Asia] opens.”

While the robust Asian market has already drawn cargoes from other regions, not surprisingly, given the aforementioned economics, little evidence has yet been seen of northwest Europe cargoes being booked for the east.

On Wednesday a producer said: “Well, surplus out of the Med [has been fixed for Asia], yes, but I don’t see much moving from northwest Europe yet.”

On the same day the trader said: “I confirm only Med barrels are going to the east, plus 300,000 tonnes of US barrels that have already been fixed to go east.”

The movement of US naphtha to Asia is rare.

Further demonstrating an oversupply of US naphtha, the buyer said on Thursday that US cargoes have also been offered to Europe.

However, even if arbitrage economics did change favourably for Europe, with volumes from the Mediterranean and from the US already heading east, Asian requirements for naphtha may not be sufficient to absorb cargoes from northwest Europe too.

“It’s questionable whether Asia can absorb NWE [northwest Europe] volumes,” the buyer said on Thursday.

When asked what the outlook is for northwest Europe, and whether the oversupply will simply worsen, the producer replied on Wednesday: “It should increase the overhang of volumes in Europe when refineries are back from TA [turnaround], which again might lead to a fall in cracks/spreads.”

The trader replied on the same day: “Yes I think so [that the oversupply will indeed worsen]. We should see a correction [to the crack spread and prices] soon.”

On Thursday the buyer said: “It’s the end of year situation. Crackers [run rates] will be reduced, demand will fall away, refineries will be back [from maintenance] in November…. Something has to happen.”

By: Jo Pitches
+44 208 652 3214

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