The Asian naphtha crack spread surged to a near seven-month high Tuesday, as outright cargo prices and differentials improved amid concerns that the Colonial Pipeline outage would divert European naphtha to the US for gasoline blending and limit Asian supply, traders said.
The CFR Japan naphtha crack spread versus front-month January ICE Brent futures soared by $15.50/mt on the day to $82.83/mt Tuesday, the widest since hitting $86.23/mt on April 5, S&P Global Platts data showed.
This comes as the December Northwest Europe crack spread strengthened to minus 50 cents/mt at the Asian close Tuesday, from minus $1.75/mt Monday, and minus $3.80/mt in early October, Platts data showed.
The Colonial Pipeline, the main artery connecting US Gulf Coast oil products to East Coast markets, shut its gasoline and distillates lines in Shelby County, Alabama, following reports of a fire on its right of way, the company said Monday.
This led to an increase in demand for arbitrage barrels of blending grades of naphtha around the second-half of September from Europe and the Mediterranean to the US, with some estimates of almost 250,000 mt.
In effect, this led to more flows of Middle Eastern naphtha to Europe/Mediterranean, extending a trend seen since the end of August due to the weak Asian market at that time.
Asian cargoes even moved to Europe in a rare reverse arbitrage, with three shipments from India seen at the end of September to Northwest Europe, trade and shipping sources said at the time.
SUPPLY JITTERS AS DEMAND RECOVERS
Traders said that, with demand in Asia recovering in recent weeks as naphtha-fed steam crackers completed their annual maintenance and began running at maximum rates to leverage healthy ethylene margins, any shortfalls in western naphtha flows to this region due to the impact of the latest Colonial Pipeline problem would propel the market higher.
The region is also seeing less supply from India as Indian Oil Corp. phased out its monthly cargoes from the Paradip refinery as the gasoline-making reformer started up end-September, with end-year maintenance at two major refineries in Saudi Arabia is set to limit supply further.
But the expected November start-ups of the new Qatari condensate splitter and South Korean Hyundai Oilbank's 130,000 b/d condensate splitter at Daesan complex, in a joint venture with Lotte Chemical, will likely offer some relief to tightening supply.
"There are expectations of lesser European naphtha coming east. But it really depends on the duration of this issue," another trader said.
A lot of gasoline will move to the US from an already tight European market, a third trade source said, adding that this would impact naphtha supply as well, which would be held back in Europe for gasoline blending purposes.
Asia has already been getting lower-than-normal naphtha supply from Europe in recent months, seen below 700,000 mt each month in September and October, down from 1 million-1.5 million mt monthly last year, traders said.
While baseload shipments in November are expected to be up to 800,000 mt, the recent Colonial outage has raised concerns that some of these could be diverted west, traders said.
The December East/West spread on Tuesday was valued at $7.75/mt, widening from $5.50/mt on Monday, but still far off the threshold of above $20/mt to enable traders to make a viable arbitrage movement from Europe to Asia that was last seen around early April.
The bullish market also sent CFR Japan naphtha cargo prices up $11.50/mt day on day to be assessed at $451.38/mt Tuesday.
The impact was seen immediately in the latest CFR spot cargoes to be delivered in second-half December to South Korea.
LG Chem's import tender was heard awarded Tuesday around a premium of $1-$1.50/mt to the Mean of Platts Japan naphtha assessments, for open spec naphtha with a minimum paraffin content of 70% CFR Daesan.
Another cargo was heard done around parity to a slight premium for a similar cargo for delivery to Yeosu, traders said.
This compares with LG Chem's last purchase by tender for unspecified volume of similar-grade naphtha for delivery during H1 or H2 December to Daesan, at a discount of around $2/mt to the MOPJ naphtha assessments, CFR.
The Platts CFR Korea differential assessed at parity Tuesday was the strongest since April 22, when it was assessed at a 25-cent/mt premium. - Platts