FocusEurope naphtha outlook appears brighter

23 January 2013 13:47  [Source: ICIS news]

Europe naphtha heads eastLONDON (ICIS)--Prospects for the European naphtha market appear more optimistic than they have for many weeks, with robust Asian demand having cleared much of Europe’s persistent oversupply, sources said on Wednesday.

A stronger gasoline market is also increasing blending demand for naphtha.

Following closed outbound arbitrages and an increasing European surplus during the latter weeks of 2012, an arbitrage east has now remained open for two to three weeks.

Around a million tonnes of European naphtha, both from the Mediterranean and northwest Europe, were booked for Asia during the first two weeks of January.

On Wednesday morning the east-west price spread stood at $18.50-19/tonne. While dependent on factors such as freight rates, a spread of $15-20/tonne is usually deemed necessary to make sending volumes east profitable.

“The arb is wide open,” a trader confirmed. “[There are] Huge lots [going to Asia]. The market is cleaning up fast, the Med is sold out. ARA [the Amsterdam-Rotterdam-Antwerp region] is clearing into gasoline [the gasoline sector]. Feb looks tight.”

On the same day, a second trader said: “The Med is definitely tight as it’s all going to Asia following Middle East turnarounds and good Asian demand. The north [northeast Europe] seems less tight though, but more balanced than it was. Gasoline is currently very strong.”

The weakest factor affecting the market at present is subdued petrochemical demand. For a number of weeks rival feedstock propane has been priced below naphtha, rendering it the first choice for petrochemical buyers. While prices of the former have recovered slightly in recent days as cold weather has tightened its grip on parts of Europe, potentially increasing requirements for heating fuel, a wide price spread remains between the two products.

On Wednesday morning, the January propane-naphtha price spread stood at $68/tonne, while for February it was $73/tonne.

Such a spread is very unusual at this time of year, when demand for heating fuel usually drives propane prices above naphtha.

The second trader said: “Regarding propane, this product is volatile that such a minor change [in prices] isn’t really caused by any fundamental change. It is more coming from the bears winning the battle to the bulls in the short term.”

Despite this strengthening of the naphtha market, the crack spread remains relatively weak.

On Wednesday morning, the February refining margin stood at minus $6/bbl.

“As far as nap spreads are concerned, they could be getting stronger indeed," the second trader said commenting on whether the crack spread should be stronger given relatively robust narket conditions.

There are hopes that this market strength will persist for at least a few weeks.

With Asian refinery turnarounds expected in the spring, and reduced exports from India to the Asian market, prospects for further European volumes heading east look promising.

When asked how long this relatively healthy demand for European naphtha could last, the second trader replied: “In February and March, yes. But Q2 and Q3 should not look that great as the March loading from the Med will hit the east in April and even early May.”

By: Jo Pitches
+44 208 652 3214

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