European naphtha bullish entering February on support from US gasoline imports
European naphtha is set to see its bullish sentiment continue entering February on a boost from gasoline exports to the US, even as heating demand eases.
The backwardation in the February-March CIF naphtha swap market structure steepened 30.4% on the week to close at $7.50/mt on Jan. 28. The January average has been $5.54/mt so far, and the latest value was the steepest since July 10, 2020, when the backwardation was $8.75/mt.
Support was seen over the course of the week on higher gasoline exports to the US. Total gasoline exports to the US stood at 5.22 million barrels in January to date, against 4.52 million barrels in December 2020. For February, 680,000 barrels have already been destined for the US Atlantic Coast, according to data from Kpler.
The stronger arbitrage economics was also reflected in the spread between NYMEX RBOB and Brent crude oil, which closed at $11.50/b on Jan. 28 — a 26.8% increase on the week. Averaging $8.99/b in January so far, the spread was last wider on Aug. 28, 2020. Western interest is likely to continue into February as COVID-19 lockdown restrictions across the Atlantic are not as strict, which is bullish for mobility.
“[RBOB against Brent spread] rallying again,” a source said.
The market also got a boost in the aftermath of the US Energy Information Administration reporting Jan. 27 a 9.91 million barrel drop in US crude oil stocks for the week ended Jan. 22.
Domestic consumption of gasoline has not improved much, with blending margins as represented by a differential of the February NWE Eurobob gasoline swap contract against naphtha equivalent closing at minus $8.75/mt. The average for the month to date stood at minus $6.60/mt compared with a $50.68/mt premium over the same period in 2020.
The European naphtha complex remained firmly supported by demand for feedstock grades, which was expected to continue further into February until propane gradually reenters the European steam cracking pool. The monthly contract prices of ethylene and propylene — building blocks of plastics and requiring a feedstock for production — are anticipated to increase further for February, which is also a bullish factor for naphtha.
The main reason propane remained uncompetitive against naphtha was heating demand in Northwest Europe and low supply domestically, but also from the US. The latest EIA data showed another draw in propane and propylene stocks in the US of 2.208 million barrels.
“The US inventory of LPG is quite low, the arb [arbitrage] to Europe is still not there,” a source said.
LPG to track LNG demand
A rise in domestic propane prices was associated with Asian markets that bought LNG to meet heating demand, which LPG also tracked.
Shortfalls in LNG and other fossil fuels led to a surge in Japanese power prices. During the first two weeks of 2021, the day-ahead 24-hour price rose more than Yen 100/kWh to Yen 154.57/kWh ($1-$1.50/kWh), according to the Japan Electric Power Exchange.
However, global gas and LNG prices have been retracing from a period of unprecedented gains during first-half January, led by below-average temperatures in Asia and Europe, production concerns at key projects, as well as freight limitations. Market participants were expecting spot prices to fall as the market rolled over to March.
Milder upcoming weather conditions and a closing of the arbitrage to Asia has meant more LNG cargoes are to arrive into Europe for March, easing gas hub prices.
This could be the pattern LPG markets would follow too as propane for steam cracking competes with winter heating demand. Easing LPG price differentials against naphtha would make the latter a less competitive feedstock domestically. It could also redirect higher naphtha arbitrage flows East from Europe.
The February CIF NWE propane swap against naphtha equivalent closed at minus $22.50/mt on Jan. 28, down $8.25/mt on the week, with propane remaining too expensive against naphtha as a feedstock. Commonly, petrochemicals producers would consider cracking propane at below minus $50/mt differentials.