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Feature: East-West naphtha spread doubles in a week amid supply glut in Europe

The East/West naphtha spread has doubled in a week, potentially luring more western barrels to Asia, although weak demand could limit the flow and leave Europe to grapple with an even greater supply glut, market sources said Tuesday.

The spread between the March CFR Japan naphtha and CIF Northwest Europe naphtha assessments widened to $17.50/mt at Friday’s Asian close, more than doubling since opening the week at $8.50/mt last Monday, S&P Global Platts data showed. After the month roll, the front month April East/West spread held close to that level at $17/mt at Monday’s Asian close, and stood at $17.50/mt at the close in Europe.

This reflects that although the Asian naphtha market is weakening, the European market is weakening at a faster rate, market sources said.

Europe is currently receiving naphtha from many sources that decided not to sell to Asia as the coronavirus outbreak cut demand, which has lengthened supply in the region, sources said.

While the glut in supply in Europe could indicate it was more profitable for European traders to send their cargoes to Asia, declining steam cracker run rates in Asia may limit the willingness of traders to take the risk, market sources said.

Asia is typically net short of naphtha, but transportation delays and downstream demand destruction caused by the coronavirus have significantly impacted demand in recent weeks. Europe’s excess naphtha typically flows into Asia.

Western arbitrage arrivals in Asia were expected to total close to 2 million mt in March due to the rollover of cargoes from February, however market sources said April arrivals could be lower at 1.5 million-1.7 million mt as the arbitrage economics were less favorable two weeks ago. Asia typically imports around 2 million mt/month of naphtha.

Freight for an LR2 Mediterranean to Japan voyage has been rangebound at $2.45 million-$2.675 million over the past week, and was assessed at $2.65 million on Monday, Platts data showed. This is higher than the February average of $2.5 million mt, Platts data showed.

SENTIMENT MIXED IN ASIA

Even with prices on paper indicating it would be viable to send naphtha cargoes from Europe to Asia, Asia’s demand has thinned due to developments from the coronavirus outbreak.

At least two South Korean steam crackers will start lowering operating rates by 5%-10% this week due to the domestic oversupply of ethylene and butadiene, sources said. This is expected to further dampen demand for naphtha feedstock, even as benchmark CFR Japan naphtha prices hit the lowest in two years and seven months, sources said.

The CFR Japan naphtha price hit a two and a half year low of $432/mt at the Asian close Friday due to weak demand and softer crude prices; it was last lower on July 19, 2017 at $427.375/mt, Platts data showed. The price increased in line with the day-on-day gain in crude to $439.125/mt at Monday’s Asian close.

While sluggish petrochemical demand has weakened the naphtha market in Asia, low price levels and short supply from regional refiners were providing a floor. In addition, steam cracker run cuts are likely to be limited for now as margins remain healthy for propylene, sources said.

“The reason why the current market is supportive is most traders believe China will import more naphtha because [of lower domestic supply], but some crackers are due to turnaround in April so import volumes may decrease then,” a North Asian end-user said.

The situation remains uncertain, and many market participants were adopting a wait-and-see approach, sources said.

“Now the Chinese government is encouraging companies to run their plants as much as possible as they worry about the economy shrinking. But the coronavirus outbreak is getting serious in South Korea and Japan, and even in Europe and the US, so it is difficult to decide whether to maintain or cut run rates,” another North Asian end-user said.

OUTLOOK BEARISH FOR EUROPE

The European naphtha market edged up from a multi-year low on the first trading day in March, with the key CIF NWE naphtha cargo assessment up $16.50/mt from the previous session at $420.50/mt Monday, largely on the back of a rebound in crude oil futures on the day, and most market participants were expecting further devaluation in the near term. It was last lower at $404/mt on July 11, 2017, Platts data showed.

With supply outpacing demand, a decrease in prices could spur petrochemical producers in Europe to utilize more naphtha, given ethylene margins were assessed at $389.17/mt Monday.

However, uncertainty over the demand outlook for olefins due to developments in the spread of the coronavirus was dampening market activity, sources said.

“I believe that [European naphtha] will weaken further,” a market source in Europe said.

Reflecting the ebbing strength in the European naphtha complex, the front month April North West Europe crack spread was assessed down 82 cents from the previous session at minus $5.27/mt at Monday’s European close, Platts data showed.
Source: Platts

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