Tight supply for naphtha in both Asia and Europe has seen a tug of war between the regions for US-origin cargoes, resulting in US naphtha shipments to Europe reaching a multi-year high for July arrivals while diminishing supplies to Asia.
Asia is typically the outlet for excess European and US naphtha cargoes, however, a tight European segment and low refining runs has left Asia and Europe competing for US Gulf Coast naphtha cargoes in recent weeks.
Shipping fixtures showed US Gulf Coast to Asia shipments decreased to around 532,000 mt for the July-loading program, down from 724,000 mt which loaded in June, and 914,000 mt loaded in May, according to data from market sources and S&P Global Platts’ trade-flow software cFlow. Market sources said structural arbitrage between USGC and Asia ranges 300,000-500,000 mt monthly, while additional cargoes ship over on economical arbitrage.
Several fixtures were also noted to have both Asia and trans-Atlantic options, as traders chose the most profitable outlets for their cargo, and at least 174,000 mt of arbitrage naphtha which were booked with both voyage options turned out to be headed into Europe.
Typical USGC to Europe volumes stand at around 200,000 mt per month, according to industry sources, but rose notably to 399,000 mt for July till-date arrivals, a near four-year high, Kpler data showed. The volumes are largely of the petrochemical feedstock grades and are anticipated to remain elevated for August arrivals as well, however, market sources said this was insufficient to alleviate tightness in Europe.
“It really feels like we need those barrels,” a source said.
High cracker runs, expensive LPG boost naphtha demand
Asia and Europe’s petrochemical makers are maximizing naphtha utilization rates against LPG, as LPG was seeing an unseasonal tightness for the summer period.
Moreover, positive olefin margins have kept crackers keen on full run rates in both regions, while Asia also experienced demand growth from new crackers which started in H2 June.
The key CFR Northeast Asia ethylene spread to C+F Japan naphtha has been above the typical breakeven of $250/mt for integrated producers since June 29, and has hovered within the $300-$350/mt typical breakeven level for non-integrated producers since July 15, Platts data showed. This positive olefin margin bolstered naphtha demand as a petrochemical feedstock.
Market participants monitor closely as well the settlement of August ethylene and propylene industry contract prices in Europe, which will reflect naphtha buying interest.
European naphtha strength to persist
Europe’s naphtha market is anticipated to peak towards the end of July and remain tight till early August due to rising gasoline consumption, in line with the holiday season, sources said.
This increase in naphtha blendstocks demand further exacerbates supply tightness from lower refinery run rates. Though a ban on light distillate exports from Russia is less likely considering falling domestic gasoline prices, August naphtha arrivals to NWE can only be marginally higher due to substantial ongoing maintenance in domestic refineries.
“We expect August exports a tad higher,” a source said.
The combination of factors has led to substantial support reflected in the paper market where the naphtha CIF NWE crack spread closed at a fresh multi-year high.
The front month August naphtha CIF NWE crack spread stood at $1.55/b up more than a two-fold since the beginning of July and, and highest since Nov. 27, 2017.
On the blending side, margins domestically remained relatively stable, despite a boost seen for gasoline in NWE and the Mediterranean, with petrochemicals demand supporting naphtha flat price. Renewed interest for gasoline exports to the West further lifted sentiment, while the differential between RBOB front month August swap contract and the equivalent Brent frontline closed at $23.48/b on July 27, up 16.5% since the beginning of July. The spread is commonly used to gauge sentiment for gasoline arbitrage in the West.
Around 1.398 million mt of gasoline is estimated to flow from European destinations to the US, with at least 1.242 million mt destined for the Atlantic coast in July so far and the remainder for the USGC, Kpler data showed. The total for June stood at 1.754 million mt, Kpler showed.
Asia naphtha propelled by European competition
With Europe thin on excess naphtha, Asia had to pay up to compete for naphtha cargoes, driving up the CFR Japan naphtha physical crack against front-month ICE Brent crude futures to a near six-month high of $133.45/mt at the July 27 Asian close, up $3.525/mt on the day and last higher on Jan. 6, 2016 at $141.475/mt, Platts data showed.
Asia is set to see lower volumes of European cargoes, with just 1.5 million mt booked for the July loading program, down from 1.8 million in the June loading program, showed Platts data.