16 November 2012 09:29 [Source: ICB]
Outlook uncertain as structurally long market leads to reliance on outbound arbitrages, particularly to Asia
With the oversupply that has been expected for the last couple of weeks now building, the outlook for the European naphtha market is uncertain, participants say.
The market is likely to get even longer as the maintenance period for refineries comes to an end
"It's looking a bit longer," a producer said. "Paper [the paper market] and premiums are coming off, the backwardated structure is softening a bit."
On 8 November, the backwardation between prompt prices and December swaps stood at around $20/tonne. This compared with approximately $30/tonne on 5 November.
On the same day, a trader said: "Gasoline has been weak for three weeks [meaning that, with gasoline and naphtha prices at similar levels, there is little incentive to purchase the latter for blending purposes]. Nap is just naturally correcting."
A second trader said: "Indeed the structure is a touch softer, Europe looks a bit longer."
"There are bits and pieces of demand," the producer said. "A little bit from petchems, a little bit from gasoline. There's still a long way to come down [in terms of prices and the backwardation]. Margins at refineries are still positive, but supply will increase [when the maintenance period is over]."
In order to relieve the oversupply, an arbitrage to Asia would need to open. On 6 November, ICIS reported that a tight supply was likely to boost Asian naphtha prices. In terms of possible arbitrage opportunities, this would be welcome news for the softer European market.
However, on 8 November the arbitrage from northwest Europe to Asia remained closed for open spec naphtha, with an east-west spread of around $5/tonne for December prices. This is far narrower than the $15-20/tonne spread usually deemed necessary for an arbitrage to work.
It might just be possible to send heavy naphtha east, though, participants said. It is also thought feasible to send volumes from the Mediterranean to Asia.
The second trader said: "I think the usual Med grades move, although [there are] small margins. Hearing two are on subs [two vessels booked subject to conditions], but this is not confirmed."
Looking ahead, it seems very likely that the European surplus will grow.
The first trader said: "Petchems seem covered until December. Yes, refinery margins are not great but I still expect them to run hard once back [from maintenance]."
The second trader said: "Well, refinery margins are not great, but I don't think we're up to [run] cuts yet. Some of them [refineries] are just getting back. It's too early to talk about oversupply in Europe."
However, the source added: "It's a bit longer going forward. I feel something has to give, but not sure the arb will widen. We need to see what next week brings."
The buyer said: "Demand is generally weak, the end of the year is coming. People are reluctant to build inventories, buying is hand to mouth."
With cargoes already having been sent to Asia from both the US and the Mediterranean, when asked what the likelihood was of northwest Europe's surplus volumes also being absorbed by the east if an arbitrage opened, the buyer replied: "We could send cargoes there, but they might not be needed. They [Asia] might receive too much. They [the cargoes] might come back."
The European naphtha market's structural length is an ongoing problem, resulting in a reliance on outbound arbitrages, particularly to Asia. "800,000-900,000 tonnes need to leave Europe every month to prevent an oversupply," the buyer said.
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