Asia's physical naphtha flips into backwardation

25-Jul-11

Asia's physical naphtha prompt timespread flipped into backwardation on Friday, buoyed by the prospect of tighter supply as some Middle East cargoes head for Europe, as per Reuters. At least 140,000 tons of naphtha from the Middle East was put on options to sail to Northwest Europe in a rare reversal of arbitrage flow as demand for gasoline blending rose in the West. The outflow boosted market sentiment, causing the naphtha price and crack to hit two-month highs. Gasoline cracks rose to the highest in nearly two weeks on healthy demand from Indonesia, Malaysia and Australia. Demand from India is also likely to rise as private refiners Essar Oil and Reliance will undergo maintenance in September, tightening domestic supply. State-owned Hindustan Petroleum Corp Ltd (HPCL) has issued a tender seeking gasoline for September The spread between H1-September and H1-October widened to US$1/barrel in backwardation from parity on Thursday, ending seven weeks of contango. In the swaps market, the two prompt timespreads flipped into backwardation, lifting the product's entire 12-month forward curve into positive territory. However, the reverse arbitrage flow may not be economical now as Asia's physical naphtha price is about US$10/ton higher than Europe.