Contrary to earlier expectations, naphtha supply situation in Asia could be tight next month. Europe’s naphtha exports to Asia could witness a fall in September, as imports from northwest Europe (NWE) dwindle. This has caused arbitrage spread to thin down to plus US$1.50/ton early last week, the lowest recorded this year as per ICIS. Supplies from the Middle East, which has excess naphtha supply partly due to cancellation of orders from term customers, may increase shipments to Asia. However this may not suffice in moderating the expected tight supply.
Lower volumes of August arrivals from NWE and the Mediterranean are expected. About 500,000 tons from NWE and 90,000-120,000 tons of paraffinic quality from USA are expected in Asia. Supplies from the Mediterranean has tightened considerably one single Chinese user has grabbed all term contract volumes - Fujian Dahua had bought heavy full range naphtha from Egyptian General Petroleum Corporation’s (EGPC) Alexandria and Suez refineries for the next three months from July-September at premiums of $21/ton to Mediterranean FOB and Middle East FOB quotes.
Thus, earlier concerns that northeast Asia would not be able to absorb the expected deluge of arbitrage supplies from the west are being reassessed. The Europe/Asia differentials widened to US$16.50/ton at the end of last week, as prices in NE Asia rose faster than in northwest Europe. However, high freight costs of $25-31/ton continued to hamper arbitrage plays. Freight rates could increase further as middle distillates traders sought more long-range vessels to store weak in demand gasoil. High premiums of US$5-6/ton FOB (free on board) NWE and more than US$20/ton FOB Medittaranean had rendered the arbitrage trade unfeasible although discounts in Asia had reduced significantly. Naphtha premiums in Europe could firm further due to a recent surge in demand from mogas blenders from the US who had been attracted by healthy blending margins. The sudden flat price rally of US gasoline to over $735/tonne this week had suddenly pried open the arbitrage window from NWE to the US. The unexpected improvement in gasoline values was linked to sudden outages of refineries in America.