Europe prompt naphtha supported by Brazilian buying on ethanol woes

Continued buying from Brazil is supporting the prompt European naphtha market, trading sources said Tuesday.

Brazilian oil company Petrobras was reported to have bought a further spot cargo ex-Skikda this week, the sources said.

"Cargoes being sent to Brazil is supporting Europe, it takes extra cargoes out of the region," said one trader.

While the shortage of ethanol in Brazil and the harvest season has played a role in increased buying of naphtha, the purchases are also being driven by a lack of availability in the spot market.

"There has been a lot of naphtha that has been going into mogas blending in the States, which means there's less for Petrobras to buy in the spot market," said one source.

Front-month naphtha crack swaps Monday touched a level of minus $8/b before firming Tuesday, reaching around minus $7.50/b.

"Naphtha is needed right now in Brazil. The shipments to Brazil took some naphtha out of the Europe and therefore it has had an impact upon cracks," said another source.

In addition, severe dry weather in 2010 affected the development of the sugarcane crops harvested at this time of the year, adding further delays to new ethanol production.

Most drivers of flex-fuel vehicles switched to gasoline because of rising ethanol prices at Brazilian pumps. As cars run further on gasoline than ethanol, the biofuel loses its economic advantage if prices rise above 70% of the fossil fuel.

"The sugarcane crop has probably not been finalized yet or was not as good as expected to produce the ethanol; therefore, they are asking for more naphtha," said one source.

Typically there are two main buyers in Brazil Braskem and Petrobras who both have term contracts with Sonatrach from Skikda.

"We see three-to-four cargoes of 30,000 mt each a month. However those are factored into the market. The difference is when either or both of them are buying spot cargoes, as has been the case over the past couple of months," said one trader.

source: platts