Tightness in the European naphtha market crunched arbitrage economics for naphtha East, reflected in a dive of the East-West spread to a two-month low.
Europe to Asia naphtha arbitrage fixtures amounted to about 1.33 million mt for April-loading cargoes, slightly higher than the March-loading total of 1.317 million mt, data from market sources and S&P Global Platts' trade-flow software cFlow showed.
Chartering for May-loading shipments had begun, however volumes were thin, with just 470,000 mt heard booked for loadings in the first half of May thus far, sources said.
The front month May East-West spread -- the premium of the CFR Japan naphtha cargo swap over the CIF NWE equivalent -- was assessed at $10/mt, a two-month low. The average for the month stood at 12.93/mt down from $13.95/mt March average as low interest to send barrels to Eastern markets largely persisted.
Partially, the drop seen in the front month spread was accounted for the nearing of the month's end, when contracts roll nearing the following month's price levels. However, the trend seen for the June East-West spread was at par, averaging $13.90/mt over April, down from $14.25/mt March average and closing at $12.50/mt on the day, also a two-month low.
The spread showed an 8.5% and 5.7% drop week-on-week for May and June, respectively. The interest in East was not anticipated to pick up over May either, particularly as European market dynamics were tightening.
Tightness in European naphtha market
The European naphtha market had seen support in the previous week across both the Mediterranean but also Northwest Europe, owing to both declining supply and robust demand stemming from the petrochemicals and blending complex.
On the supply-side, Russia, one of the largest exporters into NWE continued retaining domestically large amounts of naphtha blendstocks for the purpose of building gasoline stocks. An estimated 486,000 mt naphtha total for April has discharged in NWE, down 4% from March. Lower exports volumes have been seen since February, while the April total stood way below the six-month moving average monthly volumes of 576,166 mt. The total exports from Baltics stood at 500,000 mt for April, according to Kpler data intelligence firm.
A sharp decline in the naphtha volumes moving from the Mediterranean and Black sea to NWE destinations was seen for April as well, with the total volumes for the month estimated at only 157,000 mt, down 51% from March, according to Kpler.
Commonly, when arbitrage economics to Asia are unfavorable, market participants are observed redirecting their Mediterranean and Black Sea barrels -commonly destined for the Far East- to Northwest Europe. In line with stronger demand for gasoline streams from the Mediterranean to Northwest European destinations, naphtha found support in the region as blending margins continued to improve.
"The Mediterranean is very tight right now," a source said.
Observing the levels of the domestic blending margins, the front month May Eurobob swap contract closed at a $69.25/mt premium against the equivalent naphtha on April 29, averaging $73.47/mt for April, comparing to an average of $54.69/mt for March.
Petrochemicals producers likely supported naphtha crack spread levels as well, buying them up to hedge their May feedstock exposures. The naphtha CIF NWE front month crack spread gained 92 cents/b on the week to close at minus $2.37/b on April 29.
Mixed sentiment in Asia
Mixed sentiment was heard in the Asian naphtha market, which recently saw strength in the paper backwardation structure due to tighter supply heard for the June delivery cycle and the impending start up of LG Chem's new cracker at Daesan in June, sources said.
Front month May-June Mean of Platts Japan naphtha swap spread was last assessed at $5/mt on the April 29 Asian close, down 25 cents/mt on the day from a near one-month high, Platts data showed.
"There is less demand from end users, but too many traders are short for June delivery by quite a lot," said a Singapore-based naphtha trader.
Other market participants said the overall Asian market was bearish due to planned cracker turnarounds and the increased use of LPG as an alternative feedstock.
"The light naphtha shortness has been an ongoing story, but a lot of people switched to LPG cracking so the supply balance is longer, and it is maintenance season so overall demand in June is lower than May," said a source with an Asian naphtha end-user.
Asia's naphtha steam-crackers can typically switch around 20% of their feedstock from naphtha to LPG, sources said. Use of LPG also increases olefin yields, and current olefin margins were in positive territory, sources said.
