Europe naphtha sentiment stronger on higher C2 July CP, Asia arb

27 June 2014 12:50 Source:ICIS News

LONDON (ICIS)--The northwest European naphtha markets have received a boost from a hike in the July ethylene monthly contract price (MCP) and improved arbitrage trade to Asia, industry sources said on Friday.

The July European ethylene MCP was fully confirmed at €1,220/tonne on 26 June, up by €50/tonne from the previous month. This marks the highest contract price since January 2014, when it stood at €1,240/tonne, according to ICIS data.

Margins at European petrochemical producers will be up from their current low levels on the back of what is deemed to be a larger hike in the ethylene MCP compared with month-on-month naphtha spot price rises, naphtha traders maintain.

In the week ending on 20 June, European ethylene contract cracker margins based on naphtha feedstock fell by about 4% to their lowest level for 2014 to date on the back of a rise in naphtha prices, ICIS margin analysis showed.

A naphtha trader said: "[Margins will go up] with the ethylene MCP improving €50 and the naphtha, on the day of settlement, up only $15/tonne and the euro-US dollar [exchange rate] pretty much unchanged at 1.36."

Calculations on the margins vary depending on the time frame chosen, traders maintained. A second trader remarked naphtha was up roughly $20/tonne from 28 May, when the June ethylene MCP settled, to 26 June when the July ethylene contract settled.

Northwest European naphtha spot prices rose by $18/tonne from $942/tonne CIF NWE on 28 May to $960/tonne on 26 June, ICIS data shows. 

Improved ethylene margins in turn would encourage producers to ramp up cracker run rates, boosting demand for feedstock naphtha.

A second trader said, "[Naphtha] demand from chems I think is improving with the improvements in ethylene value. Crackers are thinking of increasing runs."

The first trader added, "Naphtha is going up on the back of improving petchems margins next month and the east-west [Asian arbitrage] recovering."

"In Asia, the PX [paraxylene] values are improving in China so that could lead to some improvements in the demand," the second trader said.

The spread between July northwest Europe and Asian naphtha swaps stood at $14/tonne on Friday, up from $13/tonne last week.

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.

Europe is structurally long on naphtha, and has to export to petrochemical markets in Asia and the gasoline sector in the US to keep stocks in balance.

Additional reporting by Heidi Finch, Nel Weddle

By Cuckoo James