Wider arbitrage window to Asia supports Europe naphtha

24 July 2014 12:46 Source:ICIS News

By Cuckoo James

Wider arbitrage window to Asia supports Europe naphthaLONDON (ICIS)--A wide-open arbitrage window to Asia is supporting the European naphtha market, while gasoline and domestic petrochemical demand has become sluggish, industry sources said this week.

The naphtha arbitrage window from Europe to Asia has opened wider for the fifth consecutive week, leading to an increase in naphtha exports out of Europe.

A petrochemical producer noted the price spread between northwest Europe and Asia naphtha at $21/tonne on Wednesday morning, up from $18/tonne the previous week and $16/tonne the week before that.

New shipping fixtures reveal a minimum of 295,000 tonnes of naphtha was booked from Europe to Asia on Monday and Tuesday.

A naphtha trader said: "They [Asia] are getting a lot of naphtha from the Med."

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.

Naphtha sales into the European gasoline sector - which then exports the gasoline to the US - is suffering because of a steep rise in gasoline stockpiles on both sides of the Atlantic.

High refinery runs in the US is leading to a surge in gasoline as the country prepares for the end of the peak summer driving season. Weekly stock data from the Energy Information Administration revealed a build of 3.4m tonnes in gasoline stocks in the US last week. A build up in stocks is bad news for European gasoline exports to the US.

The loss of European gasoline exports to the US, coupled with a widening price spread between gasoline and blendstock naphtha, has suppressed demand for naphtha from this key sector.

In the downstream petrochemical sector in Europe, producers are able to purchase July propane cargoes at roughly $182/tonne cheaper than naphtha. The wide spread between both products keeps propane the feedstock of choice among petrochemical producers who go on to maximise propane use whenever they can.

In general, steam crackers in Europe are set up to switch only 25% of their production to liquefied petroleum gas (LPG). Nevertheless, there is a huge variation as newer crackers often have more flexibility in switching between the feedstocks, while older crackers are often unable to crack propane.

Naphtha arbitrage

By Cuckoo James