FocusEurope naphtha prices drop, but Asia arb boosts sentiment

03 January 2014 16:32  [Source: ICIS news]

By Cuckoo James

LONDON (ICIS)--European naphtha prices have fallen sharply on the back of a steep ICE Brent crude oil futures drop but an open arbitrage window to Asia has propped up sentiment, naphtha sources said on Friday.

Northwest European cargo prices fell from $957-958/tonne CIF (cost, insurance & freight) NWE (northwest Europe) on Monday to $919-921/tonne on Friday.

"Asia is still pulling... many large vessels [are] going there," a naphtha buyer said.

"If the east continues to pull like they are right now we should see Europe improve. Anything that can go should go [to Asia] still," a naphtha trader said.

An open Asian arbitrage window over the last few weeks have tightened the European naphtha market, taking off some of the pressure from sellers.

"I do think there is product available though," the naphtha trader said.

The arbitrage window to Asia is open, with the price spread between Europe and Asia at $16/tonne for February swaps.

While dependent on factors such as freight rates, a minimum spread of $15-20/tonne is generally considered to be necessary for an arbitrage window to open east.

A naphtha shipping fixture this week revealed Europe will export at least 90,000 tonnes of naphtha to Asia in mid-January.

Europe is structurally long on naphtha, and sellers need to export to the US gasoline and Asian petrochemical sectors to keep stocks in balance.

Meanwhile, downstream petrochemical production is picking up on restocking, but alternative feedstock propane is grabbing the attention of more buyers in the new year and this could ultimately cut into naphtha demand.

"Well, LPG [liquefied petroleum gas] should be back in fashion for second half Jan... but I think the end users have pre bought quite a bit of naphtha that they need to eat through first," the naphtha trader said.

The naphtha buyer said: "If this happens, then naphtha will be weaker in the next [coming] days."

In addition, gasoline blending demand is lacklustre as the price spread between naphtha and gasoline is still narrow.

The buyer added: "Local demand is not helping, neither end users nor blenders."

"The caveat to that [open Asian arbitrage] is obviously higher refinery margins, cheaper LPG and no incentives for gasoline blending" the naphtha trader said.

By: Cuckoo James
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