An accumulation of supportive fundamentals was seen boosting sentiment in the Northwest European naphtha market Wednesday, despite an arbitrage to Asia that remained difficult to work.
While naphtha supply was reported as tight at the prompt and more balanced going into February amid healthy demand, a cold spell across Europe has been leading to more heating demand, thus limiting availability of propane as well as pushing the price of the gas higher versus naphtha.
It is generally considered that propane stops being attractive as an alternative cracking feedstock when it reaches 90% of the value of naphtha. Then, many petrochemical end-users could be expected to buy more naphtha as they maximize cracking of the traditional feedstock, and use less LPG.
The discount of the front-month CIF ARA propane swap to the equivalent CIF NWE naphtha swap narrowed to $57.75/mt Tuesday from $65.25/mt Monday. This represents the narrowest propane/naphtha spread since March 15, 2016, when it the discount of the front-month CIF ARA propane swap to the equivalent CIF NWE naphtha swap was assessed at $58/mt, S&P Global Platts data shows.
In terms of percentages, the value of front-month CIF ARA propane swap represented 88.4% of the value of the front-month CIF NWE naphtha swap, up from 86.7% Monday to the highest since January 22, 2015.
"The cold spell makes the LPG market tighter as LPG has been more used for heating," a trader said.
Support for propane was being seen not only from colder temperatures leading to increased demand for the gas for heating but also from a more difficult spot arbitrage from the US Gulf Coast.
The US Gulf Coast's marginal propane tonnes currently flow east rather than west into Northwest Europe, amid healthy incremental buying interest from Asian market participants, both for heating purposes and propane dehydrogenation plants in China amid attractive downstream prices.
That saw CIF ARA propane swap values at the front of the curve strengthen recently and European market participants will watch both inland heating demand and the supply side carefully in the weeks to come.
One storage seller in the ARA region was said to be running low on volume to sell into the spot market and if an actual shortage did materialize, that could further strengthen propane versus naphtha.
OTHER SUPPORTIVE FACTORS FOR NAPHTHA
The NWE naphtha market surged the first trading week of 2017 as spot buying interest resurfaced.
In the meantime, the Asian market also rallied on firmer demand and expectations of tighter supply, which led to hopes the naphtha arbitrage from the Mediterranean would reopen.
While this did not materialize, with the arbitrage often described as 'touch-and-go' by market participants, delays linked to bad weather in the Black Sea and the Mediterranean as well as ice in the Baltics prevented any lengthening of supply in the Antwerp-Amsterdam-Rotterdam hub.
Among the latest arbitrage fixtures, the Long Range tanker UACC Eagle was heard on subjects to load an 80,000 mt naphtha cargo around January 27 from the Russian Black Sea port of Tuapse to Japan for a $1.95 million lump sum.
"I have seen people looking but I do not think I have seen any more recent fixtures than that one," a trader said. "There is some spot buying interest in the Med...the arb east depends on what freight you can achieve on an LR2 at the moment, which is hard to say as there just are not a lot around."
According to another market participant, the arbitrage to Asia from the Mediterranean was neither wide open nor closed. "The East has been strong. The arbitrage from the Med is workable if you can get the right [freight] rates and the right cargo at the right time," he said.
An increase in demand for light virgin naphtha to be used for blending of West Africa-grade gasoline also helped as LVN premiums stayed in double digits and were not seen competing with open specification naphtha.
"With weakness in US gasoline, WAF is the best outlet for European gasoline, the majority for WAF-gasoline FOB tons in ARA sold out for balance January and there is no length building in LVN," the first trader said.
At 1130 am London time Wednesday, the February CIF NWE naphtha crack swap was trading at a 10 cents/b discount to Dated Brent, up from minus 40 cents/b at the market close Tuesday, while the February/March backwardation was trading at $3.25/mt, up from $2.75/mt.
