Focus'Surprising' Asian appetite supports Europe naphtha market

03 May 2013 13:28  [Source: ICIS news]

By Cuckoo James

Asia appetite supports Europe naphtha marketLONDON (ICIS)--An oversupplied European naphtha market is finding some relief in a "surprising" appetite for naphtha in the Asian export market, preventing prices from falling further, industry sources said this week.

Around 1m tonnes of naphtha from Europe is expected to head to Asia in May for delivery in June – higher than the average regular volumes of 600,000 tonnes/month.

The naphtha market in northwest Europe had been oversupplied until recently, and is now increasingly becoming balanced as a result.

A trader described the market as "balanced in the prompt", indicating naphtha volumes for prompt delivery were not as readily available as before.

Most of the 1m tonnes of naphtha is heading from the Mediterranean to Asia. However, a price spread of $28/tonne (€21/tonne) between northwest Europe and Asia earlier in the week had meant volumes from Europe were also being exported to Asia.

"What is keeping the market strong is the surprising strength of the Far East. Far East appetite seems to be big, they are buying from north[west Europe] and Mediterranean. How long it will last we don’t know," a second trader said.

An oversupply emerged in a bearish northwest European market in April, after the spring cracker maintenance season dampened domestic petrochemical demand, while seasonal gasoline blending demand from the US was lower than expected.

This effectively left European naphtha without an outlet for its rising inventory levels. Europe is structurally long on naphtha, and sellers need good demand from both US gasoline blending and the Asian petrochemical sector to keep stocks in balance.

The extra export volumes to Asia this month are good news for the European market, traders said.

However, lengthy supply in Asia is a cause for concern, they added, maintaining that the current support from Asian markets could vanish, and again tip the balance of supply in northwest Europe. 

"We will get long here very, very fast without the [arbitrage]," the first trader said.

A third trader said the volume moving east “is way too much” for the Asian market to absorb.

On Friday, a fourth trader said Asia may at last be realising it has too much naphtha coming its way, adding: “[It] seems the east finally realised they are getting a lot of our naphtha.”

In addition to the possibility of diminishing Asian demand in the near future, volatility in upstream crude oil prices is making the market risky for traders with vessels bound for Asia – especially as the price spread between Europe and Asia has narrowed towards the end of the week, some traders maintained.

"Well, good luck to them sending against the [arbitrage], which is definitely shut now," the first trader said, adding that it considered the price spread between the two regions less favourable now than it was towards the beginning of the week.

A European buyer said domestic demand might pick up slightly if buyers realised that naphtha prices have hit the floor.

However, volatility in ICE Brent crude oil futures and the open arbitrage to Asia means it is currently difficult to predict when naphtha prices would bottom out, sources said.

Naphtha traded at ten-month lows of $789-791/tonne CIF (cost, insurance & freight) NWE (northwest Europe) on Thursday evening.

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)

By: Cuckoo James
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