Asian market expects lower naphtha arbitrage volumes over next two months

The Asian naphtha market is expected to see curtailed arbitrage flows likely to tighten supply balances. As a result, the market may firm up into the last two months of 2013, and the demand may absorb excess naphtha supply of a monthly average of 1.1 million mt in August and September, as per sources in Platts. Market sources estimated that Asia will receive around 500,000-600,000 mt of naphtha from Western arbitrage flows in October. While there is no clarity as yet on incoming arbitrage volumes for November and December, traders said they expect arbitrage volumes over the two months to be lower compared with previous months. "The North Asia H1-November delivery period will definitely be stronger than H2 October. Arbitrage volumes will be a lot less due to refinery turnarounds in Europe over September and October, and run cuts in Europe and the Mediterranean due to poor refining margins," a Singapore-based trader said. Algeria's state-owned Sonatrach is expected to shut the 5 mln tpa condensate splitter at its 16.5 mln tpa refinery at Skikda for scheduled maintenance from mid-September to mid-October, Platts reported previously. The Skikda refinery is a major naphtha exporter and part of the structural arbitrage to Asia. Sonatrach typically exports six to seven 30,000-35,000 mt naphtha cargoes each month from its condensate splitter, in addition to six to seven cargoes from the refinery. By then, Taiwan's Formosa [naphtha-fed steam] cracker and South Korean GS Caltex's naphtha splitter will be back from turnaround, propping up demand for naphtha in Asia. Year-end seasonal demand for naphtha will likely lend some support to the market. These include unworkable economics to use LPG as an alternative cracking feedstock to naphtha, as well as peak demand season for ethylene in plastics production ahead of the Christmas and Lunar New Year holidays. In addition, market participants pointed out naphtha exports from India and the Middle East still have to be factored into the overall supply picture. Trading sources said last week that volumes from India and the Middle East are expected to hover at around 800,000 mt and 3.2 million mt for September and October loading, respectively. Asian naphtha prices have generally been on an uptrend since the beginning of September, with the benchmark Mean of Platts CFR Japan naphtha flat price assessment hitting a more six-month high of US$970.75/mt on September 9, 2013. Asian naphtha cracks have also been on the uptrend over September. At the Asian close Monday, the MOPJ H2 November naphtha crack versus November ICE Brent futures stood at US$124.48/mt, its highest in more than six months. The crack was last higher on March 1, 2013, when it stood at US$130.50/mt.