Market and product

The front-month naphtha east/west spread -- the premium of CFR Japan naphtha cargo swaps over the CIF NWE naphtha cargo swap -- narrowed to a four-month low of $21/mt Thursday, down from $22.50/mt Wednesday, thus keeping closed the naphtha arbitrage from Europe to Asia.

The last time the front-month naphtha east/west spread was assessed as this narrow was October 7, 2015, when it was $20/mt, Platts data shows.

According to naphtha trading sources, lower freight rates for long-range tankers and increased buying interest for naphtha in Asia were offset by the narrowing east/west spread, which was preventing the arbitrage from re-opening from the Baltics and made it difficult to work from the Mediterranean, which meant that more naphtha had to stay in Europe.

"Physically, the naphtha market still looks very well supplied...the problem is that the east/west spread is narrowing -- that won't help to open the arb," one market participant said.

Between January 15 and February 8, Med-japan freight rates basis 55,000 mt fell 29%, while over the same period Med-Japan freight rates basis 80,000 mt fell 39%, according to Platts data and shipping sources.

Thursday, Med-Japan freight rates for LR1 basis 55,000 mt were assessed stable at a $1.75 million lumpsum, or $31.82/mt, and rates for LR2 basis 80,000 mt were also stable at $1.9 million lumpsum, or $23.75/mt.

"The arb is marginal at these levels," a trader said.

According to a second trader, the naphtha arbitrage from Europe to Asia was currently closed, but the situation in the Asian naphtha market was improving.

"Naphtha is still going to flow from the Med to Asia as it is about trying to find the 'least worst' netback at the moment and it's better to push cargoes east than sending them to NWE," a third trader said.

At noon London time Friday, the March east/west spread was heard trading narrower at $20.50/mt.