Naphtha east-west spread surges higher on tight Asia market
Quantum Commodity Intelligence - The spread between naphtha in northwest Europe and Asia is at its highest in over two years on tight supply and a recovery in demand east of Suez, but expensive freight is keeping a lid on European outflows for now.
Naphtha CIF Japan swaps' premium to cif northwest Europe naphtha swaps reached $28.25/mt by Wednesday's close, up from around $20/mt at the start of September, and its widest since 2020.
Refinery maintenance in Asia and a fall in supply in Japan has driven up values.
Naphtha stocks in Japan have fallen 13% over the last two weeks to 7.8 million barrels as of 10 September, according to the latest Petroleum Association of Japan data.
Japan's naphtha stocks fell to a five-month low 7.5 million barrels last month, and are around 20% below their historical average.
Naphtha production has averaged around 1.3 million bpd in the last two weeks, a one-year low.
Refinery maintenance in India and low runs in China has also contributed further to lower naphtha output in the region, said traders.
China's ongoing struggle with Covid saw throughputs there plunge 520,000 bpd in July to just 12.8 mb/d, according to the IEA, wiping out half of the expected monthly growth in global runs.
Demand
Asia demand has firmed at the same time, with brokers reporting to Quantum a jump in spot interest from petrochemical producers in Japan, South Korea and China lately.
It helped push up naphtha cracks in Asia to a one-month high of -$16.80/b versus ICE Brent crude at Thursday's Asia close, up from around -$22.50/b at the start of September.
European exporters have yet to see a significant pull from Asia, however, with freight rates still prohibitively expensive on the route.
Freight is still over $60/mt on 60,000mt LR1s and 80,000 LR2s between the Mediterranean and Japan, which makes the east-west arb unworkable on paper.
Brokers said on Thursday it was still more likely to be a 'push' from Europe, rather than a 'pull' from Asia, if naphtha cargoes were now heading east.
Naphtha has been heading into northwest Europe from the Mediterranean for most of the summer because of lacklustre petrochemical demand in the east, but it has been equally soft in Europe.
The German petrochemical sector is set to shrink 8.5% this year because of soaring energy costs, due to the shortfalls in Russian natural gas.
A subdued summer driving season has reduced demand from the gasoline blending pool at the same time, even with an uptick recently due to the seasonal switch to winter-grade gasoline.
