Tighter European supply slings Asian naphtha physical crack up $82/mt on week

Benchmark CFR Japan naphtha saw a stark revival this week amid falling refinery operation levels in Europe and the backdrop of increasing delivery costs, which lead to a sharp $82/mt week-on-week rebound in the physical crack, according to S&P Global Platts data.

The CFR Japan naphtha physical cracks against front-month ICE Brent crude futures flipped back into positive territory this week and strengthened to a near 10-week high of $66.80/mt at Thursday’s Asian close. The crack was last higher on February 14 at $67.575/mt, Platts data showed.

Naphtha CIF NWE equivalent cracks, on the other hand, although tightened, were still in negative territory. The naphtha CIF NWE cargo crack against front-month ICE Brent crude futures was at minus $7.50/b at Thursday’s European close, Platts data showed.

“The world needs naphtha but the crack is still a negative, funny world!” a European source said.
Supply from Europe to contract

Many European refineries reduced runs due to the domestic products glut on limited transportation amid the coronavirus lockdowns imposed, among which are Italian refineries Gravenchon — which halted several units — Grandpuits and Feyzin, which did not return to operations after maintenance, sources said.

Most of the refineries reduced production of gasoline and gasoline-blending components, including naphtha, which could have contributed to reduced naphtha supply eastbound.

The propane to naphtha spread — the differential between the April swaps for Platts Propane CIF NWE Large Cargo and Platts Naphtha CIF NWE — was assessed at $80.75/mt at the European close Thursday, down $11/mt on the day, Platts data showed.

In spite of the spate of refinery run cuts, many traders were concerned the supply surplus was still significant and further refinery run cuts might be required. Also, certain Russian refineries were heard adjusting yields away from gasoline toward feedstock production, particularly naphtha, as it was priced at a steep discount to its competitor propane.

Despite the naphtha oversupply in Europe and robust demand for the product in Asia, flows could be disrupted as the availability of vessels of all sizes in Europe that could be used for storage or transportation becomes scarcer while shipowners charge unprecedented freight.

It was uncertain how the costs of the loss in demand and oversupply would be split among market participants or how the economic fundamentals would be impacted, sources said.

Depending on the contract type in place, the cost “pie” could be split differently, as with a take-or-pay contract a buyer could stop lifting barrels to the extent possible, but with different contractual arrangements traders could be incurring the entire loss amount.

“Traders will be at a loss until they can invoke force majeure due to total lack of vessels,” a European trader said.
Asian end-user demand holds firm

The Asian naphtha complex received a high volume of Western arbitrage cargoes to supplement supply for the May-delivery cycle, from which end-users were able to snap up cargoes at competitive levels. But this could change with the reduced refinery run rates in Europe, sources said.

Asia’s typical net short is about 2 million mt each month, and it relies on arbitrage shipments from the West to meet this need, sources said. Shipping fixtures showed 1.301 million mt of Europe-Asia naphtha cargoes for April loading, and so far, 332,000 mt of May-loading shipments.

US-Asia naphtha ballooned from the usual 200,000-250,000 mt monthly arrivals to at least 893,000 mt loading in April, ship fixtures showed. Total West-Asia naphtha arbitrage fixtures for April-loading are 2.254 million mt, Platts data showed.

“Asian demand is quite good, the margins are okay to run 100% for petrochemical plants, China demand is not bad too,” said another North Asian end-user source.

Demand-side fundamentals remain stable in Asia, as most Asian steam crackers are operating at full capacity due to favorable petrochemical margins, said sources.

“The MOPJ naphtha crack needs to go up to $100/mt before steam crackers reduce operation rates. We have a time-lag to [when upstream prices affect downstream] cargoes, so within the next month, no one will be reducing operation rates,” said a naphtha trader with a North Asian end-user.

The benchmark naphtha C+F Japan cargo was assessed at $232.25/mt at Thursday’s Asian close, up $52.50/mt on the day. In comparison, the March average was $290.26/mt and the month-to-date average is $192.96/mt.

Naphtha CIF NWE was assessed at $147.50/mt, up $15.50/mt on the day at the European close on Thursday. The average for March was at $246.70/mt while April to-date averaged $161.75/mt, Platts data showed.
Source: Platts