The Asian naphtha market staged a rebound in recent trading sessions, as supplies gradually tightened in the region with European producers and traders struggling to push their surplus cargoes to the Far East amid lofty LR freight rates, market participants said Tuesday.
The Northeast Asian naphtha market structure has flipped to backwardation, with the spread between the first-line and third-line CFR Japan naphtha physical benchmark settling at $3.25/mt last Friday, up from minus 25 cents/b the previous day, S&P Global Platts data showed.
The market had been locked in a contango structure for almost two months since October 9, when the spread was assessed at minus $2/b, as Asia failed to absorb the flurry of European arbitrage supplies with many Asian petrochemical plants struggling to optimize their run rates without hurting their cracking economics amid weak downstream margins.
However, trade sources said the spread between the first-line and third-line trading cycles -- currently the H1 February and H1 March delivery laycans -- could stay in positive territory at least in the near term if arbitrage naphtha flows from Europe continue to slow down.
Traders surveyed by Platts said they expect around 1.5 million-1.8 million mt of naphtha from Europe to reach Asia in January -- a downward revision from the initial forecast of 1.7 million-2 million mt.
Market sources noted that rising freight rates would make European cargoes less competitive in the Asian market, essentially discouraging the sellers in the West to look for buyers in the Far East.
The chartering rate for LR1 vessels moving naphtha from the Mediterranean to Japan was assessed at $41.82/mt on Monday, and for LR2 tankers at $33.75/mt.
Both tanker rates were above the previous week's average of $39.636/mt and $33.378/mt, respectively, and the LR2 rate is up around 93% since the lowest point for the year so far of $17.50/mt on May 18, Platts data showed.
Asian end-users should be able to absorb any excess supply left in the region in January and the supply/demand dynamics could stay largely balanced in February as long as European arbitrage flows remain limited, a Singapore-based trader said.
"There will be no overhang in January," the trader said.
Platts last assessed the CFR Japan physical benchmark naphtha spread for H1 February/H1 March at plus $3/b Monday.
