Europe naphtha, gasoline markets bullish on plenty of arbitrage

Focus article by Cuckoo James

LONDON (ICIS)–European naphtha and gasoline markets are bullish on firm overseas demand and potential re-opening of long-shut arbitrage windows.

Additionally, inventories at the Amsterdam-Rotterdam-Antwerp (ARA) shipping hub terminals are close to this year’s low.

Naphtha traders are optimistic on hopes of improved arbitrage economics on the long-shut Asian trade route, sustained gasoline blending demand and news of an earlier-than-expected cracker restart at the BASF Ludwigshafen petrochemical complex in Germany.

Naphtha is used as a blendstock in gasoline production and to make reformate, a high-octane gasoline component usually exported to China. It is also a petrochemical feedstock.

In the meantime, gasoline traders continue to take advantage of recurrent arbitrage opportunities to the US and West Africa, while increasing exports into Asia.

Asian demand for gasoline has risen in the past few days.

Europe is structurally long on gasoline and naphtha and is reliant on exports to balance stocks.

“Most arbs look okay out of Europe right now,” a trader said.

The European gasoline arbitrage window to the US shut briefly at the end of the first week of October, before re-opening a week later.

The gasoline arbitrage has worked intermittently for European traders since then, especially after Colonial, the biggest oil products transport organisation in the US, said on Monday 17 October that it would reduce allocations on its Colonial Pipeline by 20% for 10 days.

However, there are plenty of gasoline cargoes en route to the US east coast and competition is stiff, which traders say has dulled their appetite to book additional cargoes.

Petrochemical major BASF said late on Wednesday 19 October that within days it will begin restarting its steam crackers at the Ludwigshafen petrochemicals hub on the Rhine river in Germany following Monday’s fatal explosion and fire.

The news is bullish for the European naphtha market. The two crackers have the capacity to process about 2m tonnes of naphtha per annum.

The Asian naphtha arbitrage window has been shut for the most part of the year on a steady deterioration in the price spread between the two regions from late $20s/tonne in January to single-digit numbers in September.

A minimum spread of $20-25/tonne is generally necessary for an arbitrage window to open east.

The price difference between Europe and Asia is currently stable at a narrow level of approximately $8/tonne for November, which is insufficient for an arbitrage to open.

However, full-range Asian naphtha is now being sold at a premium of over $2/tonne against the main cargo assessment for Japan, which has helped to widen the arbitrage.

European traders are unsure whether an arbitrage opportunity will materialise, but maintain tight fundamentals in Asia could work in their favour.

“It feels a bit that way. We need to see some follow through. A relationship is more than a first date,” the trader said.

Asian naphtha prices rose last week despite dips in weekly crude futures, as the market is facing tighter supply and rising demand.

More importantly, Asia’s steam crackers are returning from peak maintenance season, while many refinery suppliers in the Middle East are about to go on turnarounds.

This, along with any crude oil price hikes, could widen the east-west price spread further and open up the arbitrage window.

“We just need a bit of bad weather and we will have the perfect storm to reopen the arb that has been shut for so long,” a second trader said. 

Bad weather can delay deliveries and cause delays at loading ports which would mean buyers will look for prompt replacements and pay up, the second trader said.