European naphtha front-month cracks have risen by nearly $2/barrel since the start of the week due to strong Brazilian demand for naphtha as a gasoline blend stock, sources said Thursday.
Front month cracks were seen Thursday at minus $5.10/barrel, compared with minus $6.90/b last Friday.
"The market seems stronger, there is a lack of prompt barrels on offer but there has been a huge focus on European prices," said one source.
The cracks have risen due to growing Brazilian demand for naphtha as a blend stock and for gasoline blending emerged due to a shortage of ethanol. "Naphtha is needed right now in Brazil. The shipments to Brazil took some naphtha out of the European market and therefore it has had an impact upon cracks," said another source.
The shortage of ethanol in Brazil culminated Tuesday in a meeting between ministers and representatives of the sugar industry at which the federal government called for an immediate start to the sugar harvest to avoid disruption.
In addition, severe dry weather in 2010 affected the development of the sugarcane crops harvested at this time of the year, adding further delays to new ethanol production.
Most drivers of flex-fuel vehicles switched to gasoline because of rising ethanol prices at Brazilian pumps. As cars run further on gasoline than ethanol, the biofuel loses its economic advantage if prices rise above 70% of the fossil fuel.
"The sugarcane crop has probably not been finalized yet or was not as good as expected to produce the ethanol therefore they are asking for more naphtha," said one source.
Sources said that traders were putting forward strong bids for FOB barrels that were being tendered out of the Mediterranean following reports of some oil leaving the region for the Brazilian market in the last week.
