Naphtha arbitrage to Asia under pressure from expensive freight, weaker premiums in Asia

13-Aug-14

The naphtha arbitrage from Europe to Asia is coming under pressure from expensive freight costs for long-range tankers and weaker physical premiums in Asia, as per trading sources in Platts. While the front-month east/west spread -- the premium of CFR Japan naphtha cargo swaps over the CIF NWE naphtha cargo swap -- was pegged at US$27/mt Tuesday, up from US$25.50/mt Monday, market participants said the naphtha arbitrage to Asia had closed from Northwest Europe and was still workable but less profitable and/or less attractive from the Mediterranean and the Black Sea. "The arbitrage from the Mediterranean to Asia is definitely not wide open anymore because premiums in Asia have fallen and freight is still expensive," a trader said. A shipbroker said the arbitrage was still open, but inquiries had become more erratic. Freight costs for a Med-Japan naphtha fixture were pegged Monday at US$2.3 mln for an LR1 loading a 55,000 mt cargo and around US$2.7-2.8 mln for an LR2 loaded with a 80,000 mt cargo. Fresh enquiries are drying up and tonnage in the North is expected to build from August 20 onwards, causing the market to begin to soften over the week. In Asia, ample supplies and lackluster demand were still putting pressure on the market, sources said. "It's still very weak," a source said Tuesday, adding that while no fresh spot trades for naphtha cargoes for delivery into North Asia have been heard, traders were estimating spot differentials for open spec naphtha -- with a minimum paraffin content of 70% -- for H2 September delivery into South Korea at discounted levels. Also, the reported tightness of the long-range tanker tonnage, not only in Europe but also in the Persian Gulf, was partly attributed to vessels transporting other refined products, and partly to delays in Asia due to bad weather. Industry sources said several LR2s had been occupied in an arbitrage play to lift gasoil from North Asia to West Africa for the end June and early July loading period. Since then, severe weather due to the typhoon season in North Asia also delayed vessels. Shipping sources said a number of replacement jobs in the prompt loading window were seen for LR1s as charterers had earlier fixed LR1s out of the Persian Gulf with uncertain itineraries. Asian LR vessel supply is currently thin for August loadings, and market sentiment in the long-range tanker market was firm on the back of steady activity.