Tankers: Med-Japan LR rates bound to stay low this year on closed naphtha arb

Long Range 2 tanker freight rates on Mediterranean-Japan voyage were expected to remain deflated amid expectations the east/west naphtha arbitrage will remain closed until early 2017, shipping and trading sources said.

Amid a closed naphtha arbitrage, lump sum rates on the trip have been rangebound from $1.55-$2.15 million since February, according to S&P Global Platts data.

That equates to $19.38-$26.88/mt.

Platts launched assessments for the Med-Japan route, basis 80,000 mt, in February as it is one of the active reports for naphtha arbitrage and term cargoes to Asia.

“Naphtha arbitrage is not working and potentially it is going to get worse. The contango in the naphtha market is steep and it is going to encourage trade to move to Q4 from the end-month,” a trading source said, adding there was a supply overhang in Asia with between 800,000 mt and 1 million mt available.

“There is talk that people are trying to find venues out of EuropeSome are sending stuff to the US for gasoline blending.

Only the high quality naphtha seems to be moving out of the Baltic.

On other grades of naphtha, arbitrage is closed to AsiaThe only thing that could trigger the opening of the arb is the refinery season in the first quarter of 2017,” the source said.


Another factor in the arbitrage economics to Asia from Europe is the front-month naphtha east/west spread – the premium of CFR Japan naphtha cargo swaps over the CIF NWE naphtha cargo swap – which has been on a downward trend for the first half of 2016 according to Platts data.

After hitting a 28-month low of $8.50/mt on June 30, the front-month east west spread has been oscillated between $12/mt and $15/mt this month and was assessed at $12.50/mt Friday amid a soft Asian naphtha market.

“The east is oversuppliedArab Gulf exports are high, Europe keeps trying to export its oversupply and Formosa turnaround [is upcoming],” a naphtha trader said.

Taiwan’s Formosa Petrochemical was expected to limit imports this month due to planned maintenance at its No. 2 steam cracker from August 1 to September 22.

One culprit for this year’s lingering Asian naphtha weakness is lower demand from Japan. According to Japan’s Institute of Energy Economics, naphtha demand in fiscal year 2016-17 (April-March) was expected to drop 6.1% to 43.4 billion liters (747,883 b/d) as the country decommissioned two naphtha-fed steam crackers in its 2015-16 fiscal year.

Asian naphtha cracks fell to 18-month lows at the end of last week as demand has yet to recover despite regional steam crackers gradually returning from maintenance and some already running at full capacity.

Asian naphtha remained under pressure Monday from steady seasonal exports from India while demand was limited, with physical cargo prices at 3-1/2 month lows and with cash differentials stuck in negative territory since early May.

As a result of the closed arbitrage to Asia, some Mediterranean cargoes have been trying to find a home in Northwest Europe.

“Cargoes from Spain, Algeria and Greece that were moving south now need to find new homes,” a naphtha end-user said.

Source: Platts

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