Europe naphtha balanced to long as blending appetite grows

Focus article by Cuckoo James

LONDON (ICIS)–European naphtha is shedding more of its supply length with the northern part of the region now balanced to long and the Mediterranean tight, industry sources said on Thursday.

“WAF [West African] demand [is] taking much of the material,” a naphtha trader said. WAF gasoline demand has been supporting European naphtha market since January.

In the US, stalled negotiations between the United Steelworks union (USW) and Royal Dutch Shell, weather-related refinery outages and low gasoline prices have increased the appetite for imports.

The US Energy Information Agency on Wednesday revealed a 3.1m draw in gasoline barrels in the country last week.

“So there is less production there and we are kind of filling that gap from Europe,” a naphtha buyer from the petrochemical sector said.

Naphtha is used as a gasoline blendstock and supply is balanced to long in northern Europe as a result of the blending appetite. Blending grades of naphtha carry a hefty premium outside of the open trading platform.

Light virgin naphtha and heavy naphtha are selling at a premium of $15/tonne and $35/tonne to the open-spec grade respectively, a second naphtha trader noted.

“[There is] excellent reformer margins for starters, good demand from Asia, the US and bits and pieces in Europe also. [It] adds up and obviously less exports as the reformer margin is as good as it is right now plus people using it to blend and store summer gasoline grades for the US,” a fourth naphtha trader said on hefty heavy naphtha premiums.

A substantial part of the naphtha supply in Europe is now coming from the Baltics as trade flow from other regions are curbed, a fifth trader noted.

A free flow of naphtha cargoes from the Mediterranean and Black Sea were being delayed due to ongoing weather-related issues, a sixth trader said.

Trade flow from the key ports of Skikda in Algeria and from the Tuapse port in Russia to the Black Sea is currently disrupted.

Petrochemical-grade naphtha is selling at a premium of $2-4/tonne which shows the product is tight but not “extremely” so, the petrochemical producer said.

“It will get longer very quickly if the weather issues clear up,” the sixth trader said.

Petrochemical demand from European producers is steady as propane remains tight on less supply from the US and increased use in refineries to produce steam.

The propane naphtha spread also narrowed from $110/tonne for March last Wednesday to $91/tonne on Thursday, giving naphtha an additional boost.

Despite good demand from Asia, naphtha exports are negatively affected by a narrowing price spread between the two regions. The March price spread was noted at around $21/tonne on Thursday, down from $23-24/tonne last Wednesday.

Supply from Saudi Arabia to Asia is also higher, creating more competition for naphtha cargoes moving from Europe to Asia.

However, cash differentials in Asia have improved to plus $10/tonne for a normal cargo and could help the arbitrage.