The contango between the front- and second-month CIF Northwest Europe naphtha swaps hit its widest in 25 months of $3/mt Tuesday, up from $1.75/mt Monday, as a weaker Asian market and lackluster demand in Europe weighed on sentiment, trading sources said.
While the naphtha market is usually backwardated, it has been in contango for a week due to oversupply and a lack of outlets. The last time the the contango was assessed as wide was June 26, 2012, when the August/September contango was $3/mt.
"The European naphtha market continues to weaken as it is very hard to find buyers and the naphtha market is rather long almost everywhere, not only in Europe but also in Asia," a trader said. "More and more people put naphtha in storage tanks in Europe as the deepening contango allows them to wait instead of selling at a low level."
At noon London time Wednesday, the August/September contango was heard widening to $6/mt from $5.25/mt at market close Tuesday and the September/October contango was pegged by trading sources at $5/mt.
"The East is weaker and that is putting further pressure on Europe as Europe needs to keep sending barrels East," another trader said.
According to industry sources, talks of a potential increase in European refinery runs due to higher refinery margins are adding to the bearish sentiment because greater output from refineries would put further pressure on a naphtha market already oversupplied.
In Asia, traders said the arrival of plentiful arbitrage volumes in August and September were dragging the market down.
"Too much arbitrage is coming and even though Asia demand is there, there is no change in total demand," an Asian source said. "All end-users are trying to maximize runs as [petrochemical] margins are not bad," he said.
On Wednesday, the differential between the physical assessment for C+F Japan naphtha and the forward swaps -- Naphtha MOPJ Strip -- fell to a 25-month low of $0.88/mt from $4.13/mt Tuesday, while the cash premium reported in the Asian market flattened to a nine-month low of zero from a $1.75/mt premium, Platts data shows.
