FocusAsia arbitrage only 'bull factor' in weak Europe naphtha market

19 April 2013 11:56  [Source: ICIS news]

LONDON (ICIS)--Participants in the northwest European naphtha market have resumed "booking vessels" to Asia as sales prove financially viable once again, industry sources said this week.

The open outbound Asian arbitrage is the only "bull factor" in a weak northwest European market, sources added.

The arbitrage to Asia has opened after a number of weeks, with the "east-west spread" standing at $25.00/tonne (€19.25/tonne) for May on Thursday.

A price spread of $15.00-20.00/tonne between the two regions is considered favourable for transactions to take place.

Last week, news of extra US volumes heading east undercut trade between the two regions, despite the east-west spread being at $21.00/tonne.

Partly as a result, naphtha CIF (cost, insurance & freight) NWE (northwest Europe) prices had plunged below the $800/tonne mark on Friday 12 April.

However, the shortage in Asia is deeper than the oversupply in Europe, traders said, and vessels to Asia are being booked once again.

A buyer said: "Europe needs to get rid of their naphtha anyhow ... to make it work, you need a big spread. The rule is, if the spread is big enough, Asia is more pulling than Europe is pushing."

European naphtha prices are holding steady this week after Friday's fall, despite upstream ICE Brent crude futures dipping below $100/bbl.

Naphtha prices are mostly moving in the $780s/tonne this week, after having decreased by 13% - or more than $100/tonne - from 18 March to 16 April, ICIS data shows.

"After the correction, prices are now stable," a trader said.

The trader added: "The big bull factor is that the arb is wide open to the East. The East has taken more naphtha than expected in April."

Around 1.0-1.1m tonnes of deep-sea naphtha supply is expected to arrive in Asia in May, mostly consisting of heavy naphtha that hails from northwest Europe, the Mediterranean, Russia and the US.

Nevertheless, the open arbitrage to Asia is insufficient to curb the rising supply in northwest Europe, sources said.

"In May, even if they take the same amount, the market will still be somewhat long here," the trader added.

The overall sentiment in the naphtha market continues to be bearish.

Poor domestic petrochemical demand caused by the naphtha cracker maintenance season, coupled with slow transatlantic gasoline demand, has created a market where supply is on the rise.

Demand for the key naphtha derivative ethylene continues to be poor as a result of poor business in its key polyethylene derivative.

Europe is structurally long on naphtha, and sellers need good demand from both the US gasoline blending and Asian petrochemical sector to keep the stocks in balance.

"It's oversupplied ... and trending [is becoming] very long. You don't have great demand for gasoline, they are selective on the grades they take. [Plus] you have refineries slowly coming back," the trader said.

With domestic naphtha supply rising faster than could be absorbed by Asia, the market would be heavily dependent on absorption by the US gasoline sector, market players said.

A second trader said: "Something needs to happen with the US, a huge gasoline bull run. So far we don't see [this], and we think it will go in contango. Meaning the market will be very long on prompt."

The main application of naphtha is in the petrochemical production of olefins. Naphtha is also used as a feedstock for gasoline blending.

($1 = €0.77)

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By: Cuckoo James
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