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Arbitrage watched closely as tanker freight rises for USGC naphtha to Asia

Two naphtha cargoes are expected to leave the US Gulf Coast for Asia in the next week, supporting freight rates and pointing to renewed interest in the Pacific arbitrage, market sources said this week.

Differentials for Houston naphtha barges Tuesday were running 8 cents cheaper than they were at this time last year. Market sources were split on whether the arbitrage had opened, however.

The Hafnia Leo under a Valero charter with 38,000 mt of naphtha is set to load Tuesday for an unknown Asia destination, market sources said. A Valero trader said he doubted that the Hafnia Leo would make the trip, noting, “We pick up ships, drop them, pick up ships, drop them.”

S&P Global Platts trade-flow software cFlow showed the Hafnia Leo headed to Houston from a spot south of Bolivar Peninsula, Texas, Tuesday morning.

The 60,000 mt UACC Falcon was also expected to load naphtha this week for Asia, market sources said. The charterer could not be identified Tuesday morning, and cFlow and market sources indicated that ship was bound for Japan.

The Falcon was not far from the Hafnia Leo Tuesday morning and also was headed for Houston, cFlow showed.

The Falcon was fixed at $1.45 million lumpsum around February 7 for a February 10-15 loading date, and the Hafnia Leo was fixed at $1.375 million lumpsum around February 12 for a February 13 loading date.

FREIGHT PUSHED UPWARD

Platts assessed freight for the 38,000 mt cargoes for runs between the USGC and the Far East at $1.375 million lumpsum and freight for 60,000 mt cargoes at $1.575 million lumpsum.

The stem activity pushed freight for Medium Range tankers on the route up $100,000 on the day, and up $275,000 since hitting a bottom February 1. Long Range 1 tankers on the trip in turn increased $50,000 on the day and are up $175,000 since hitting an effective floor on January 31.

Shipping sources said they believed the arbitrage across the Pacific was open. Others advised caution on such a judgment.

Since the beginning of the year, voyages into the Far East were few and far between as relatively cheap propane, used instead of naphtha as feedstock for Japanese crackers, effectively closed the arbitrage.

Additionally, for much of January and early February, shipowners preferred short-haul runs in light of an advantageous time charter equivalent effectively keeping tonnage within the region, market sources said.

“Yes, the arbitrage is open right now, but the demand in Japan remains very small,” a market source said. “We probably won’t see a whole lot of movement to the East still even with the arbitrage, especially with the MRs.”

Naphtha sent from the US to Asia is almost exclusively for petrochemicals use, and Platts does not assess petrochemical grade naphtha in the US Gulf Coast.

“Those are term shorts,” a US light ends source said about the ships. “Those barrels will leave regardless of market conditions.”

COMPARING NAPHTHA VALUES

Reformer-grade naphtha provides a rough benchmark for value. Platts assessed naphtha barges at 63 API and 38% naphthenes plus aromatics for five to 15 days forward at barge gasoline minus 17.5 cents/gal from January 26-February 12. In the same period in 2017, the differential averaged barge gasoline minus 9.5 cents/gal.

Market sources have suggested that US-made naphtha has looked more attractive than Middle East-produced naphtha in recent weeks.

In the last 200 days, naphtha cargoes FOB Houston have averaged a $5.19/mt premium to FOB Arab Gulf naphtha cargoes, Platts data showed. But in the last 50 trading days, the balance has tipped and the Houston cargoes averaged a 3.7 cents/mt discount to the Arab Gulf product, the data showed.

The calculation does not account for significant specifications differences between the regions. For example, US naphtha cargoes are assessed at maximum 350 ppm sulfur, and the Arab Gulf cargoes are on the Japan standard at maximum 650 ppm sulfur. The Japan product requires a minimum initial boiling point of minimum 77 degrees Fahrenheit, and the US product calls for 110 degrees.
Source: Platts

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